Every trader should know how to plot the Fibonacci retracement and projection with ease. However, not everyone who knows how to calculate the Fibonacci levels knows how to trade under real market condition.
To trade the Fibonacci retracements and projections effectively, a trader must also understand the price action of the forex market. And using candlestick formation is one of the most effective ways to determine the immediate market sentiment.
A hanging man formation during a downtrend shows that the bears are losing strength and the trend is about to reverse. At the same time, we must also acknowledge that there are alsoFibonacci levels to concern about. The best scenario of a rejection at the Fibonacci level is when a candlestick showing a hanging man formation closes above the 38.2% level of aFibonacci retracement.
A hanging man formation during a downtrend shows that the bears are losing strength and the trend is about to reverse. At the same time, we must also acknowledge that there are alsoFibonacci levels to concern about. The best scenario of a rejection at the Fibonacci level is when a candlestick showing a hanging man formation closes above the 38.2% level of aFibonacci retracement.
This setup proves that the uptrend is strong and the retracement is merely profit taking. The rejection at 38.2% level also reveals that more bulls are waiting at the sideline to enter the market at a more favorable market price.
Fibonacci Trading - Scalping Technique
Fibonacci trading can be used on any time frames, even as a scalping technique on a 5-minute chart and it can be quite profitable if you know how to do it in Forex trading. Let’s look at an example at the simple illustration below; assuming that the currency pair is on an uptrend movement and the price presumably has hit a top and then reversed. We would then draw the Fibonacci retracement on the uptrend shown in Point A. The priceaction then retraced to near 50% and encountered good support at that price.
In the picture Fibonacci Scalping in action.
How to enter a position
On a 5-minute chart, you should be able to tell that the candlestick formation would give you an immediate sign of a possible bounce. On the next candlestick after the low near the 50% retracement of Point A, open long if it closes higher low than the previous candlestick. Since this is a scalping method, your first profit should be the 50% retracement resistance level (Point BFibonacci retracement) from the original Point A 0% retracement to 50% where your position is entered. You would probably think that the profit target from the point of entry should be the original 0% retracement but that is not usually true. As in any market conditions; we are not be able to tell where the price is going next. Remember that this is a scalping technique which should help you to reap about 15 to 20 pips depending on the range of the Fibonacci retracement is drawn. This is useful if you have a tight stop and prefer not to hold position for more than a hour. You should be able to see consistent good results using this simple technique.
On a 5-minute chart, you should be able to tell that the candlestick formation would give you an immediate sign of a possible bounce. On the next candlestick after the low near the 50% retracement of Point A, open long if it closes higher low than the previous candlestick. Since this is a scalping method, your first profit should be the 50% retracement resistance level (Point BFibonacci retracement) from the original Point A 0% retracement to 50% where your position is entered. You would probably think that the profit target from the point of entry should be the original 0% retracement but that is not usually true. As in any market conditions; we are not be able to tell where the price is going next. Remember that this is a scalping technique which should help you to reap about 15 to 20 pips depending on the range of the Fibonacci retracement is drawn. This is useful if you have a tight stop and prefer not to hold position for more than a hour. You should be able to see consistent good results using this simple technique.
Sensitive Fibonacci Retracement Levels
Using a retracement calculation, you should try to identify the 38.2%, 50% and 61.8% of the Fibonacci retracements. If an uptrend is strong, the price action will most likely to see strong support at 38.2%, while at 50% would see bears pushing hard to open the gate. 61.8% should then be seen as the bulls are retreating to heal their wounds with the momentum temporarily shift with the bears.
The Asian session saw a big fall on Euro against the Yen on Thursday. Technically, it was very obvious on the chart and I did a short trade on the currency pair. I had mentioned Fibonacci trading last Friday as one of the methods I used. I will show you how I did it with this short trade. During the early US session on Thursday morning Eastern Time, you should see that the price moved upwards to 156.84 before a bearish 15-minute candle started the downtrend. Keeping in mind that the low was 155.54 and then the recent top was at 156.84, we calculated that the retracement should see some support at 156.04 area (see the attached calculation on the right below).
Using a retracement calculation, you should try to identify the 38.2%, 50% and 61.8% of the Fibonacci retracements. If an uptrend is strong, the price action will most likely to see strong support at 38.2%, while at 50% would see bears pushing hard to open the gate. 61.8% should then be seen as the bulls are retreating to heal their wounds with the momentum temporarily shift with the bears.
The Asian session saw a big fall on Euro against the Yen on Thursday. Technically, it was very obvious on the chart and I did a short trade on the currency pair. I had mentioned Fibonacci trading last Friday as one of the methods I used. I will show you how I did it with this short trade. During the early US session on Thursday morning Eastern Time, you should see that the price moved upwards to 156.84 before a bearish 15-minute candle started the downtrend. Keeping in mind that the low was 155.54 and then the recent top was at 156.84, we calculated that the retracement should see some support at 156.04 area (see the attached calculation on the right below).
I entered this short trade because I got a signal from my setup and it was aligned with the main day movement (downtrend). I then entered the price at 155.45 with stop-loss at 20 pips away. I set my profit target using my own calculated price 156.20 near the 61.8% retracement area. About 25 minutes later, the short position was done with a 25-pip gain. Why I entered at 156.45 was because on the 5-minute chart, there was a rejection at 156.58 which is the Fibonacci 38.2% level (155.84 to 155.42), therefore I entered at that price (also see the right calculation on the picture above).
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