FIBONACCI

The history of fibonacci ratios is fascinating .. and one day when you have time, you might want to google the word and check it out. You may have heard the term used in the movie The Da Vinci Code.
But ... you already know .. for our purposes we are just interested in how it can help us make money.

Fibonacci retracement lines are included as an indicator on nearly every charting package, including MT4. The only thing you need to learn to correctly apply fibonacci is which swing high and swing low to connect.

When you connect a swing high and swing low using the fib indicator, a series of retracement lines appear. These are the levels where price is most likely to retrace.... either upwards or downwards.

(NOTE: Fibonacci retracements like those on the charts below do not automatically appear on your charts, you will have to draw them youself, therefore you'll need to learn which highs and lows to connect)

There are also fibonacci extensions that can be used to determine a good place to exit a trade.

Since nearly every trader uses fibonacci, they also become a self-fulfilling prophecy. When price hits a .50 fib retracement, there are millions of traders thinking "OK, it hit the .50 fib .. let's buy" .. so price magically reverses at that level. There are other mathematical reasons why it would reverse there, but one should not discount the power of millions of minds believing that it will!

So how do you plot the fibonacci retracements? Your fractal arrows will help: look for the last fractal high and connect it to the last fractal low (or vice versa depending which way you are trading). If you are short, you draw your fibs from a swing high to a swing low, if long you draw from swing low to swing high.

Here are the settings for your fib indicator:

-1.27, 0, .23, .38. .50, .618, .78, 1.00, 1.27

The 0 and 100 connect the swing high and swing low. The -1.27 and + 1.27 are the extensions. The numbers in the middle are the retracement levels.

For our purposes, the value of fibs lies in adding to CONFLUENCE. Now look at the chart:

Price is in an uptrend and is retracing .. there is an area, marked in pink, where we have confluence of a two pivots + 2 fractal previous highs + fib retracement. FIVE reasons why, if price reaches this level, there is good probability it is going to reverse and continue its main trend back up. A nice place to wait for for a long entry. The fib extension at 126.44 gives a good target for exit. Let's see what happened:

Beautiful.

What about your stop? Ideally you want at least a 1:2 stop to profit ratio, so if you expect a 400 pip move you would do a 200 pip stop, However that is not necessary because with this method, you are either right or wrong. If price does not hold at that level where so much confluence exists, then it is probably not a good trade. The stop could be placed just below the next lower fib and there is also another pivot point, the Daily S3, at that level. If it drops that far, this trade setup is no longer valid. So the stop can be put at about 100 pips giving a nice 1: 4 ratio.

Of course you can say, "well it worked that time!".

That's why what you need to do now is practice on a demo account for at least 2-3 weeks. Watch for these setups every evening, set your demo trades to execute automatically and watch what happens .. again and again .. until you build your own confidence that this method works.

That's what I had to do too.

Once you see price reacting the same way, nearly every time, to these points of CONFLUENCE you will gain confidence and while you won't win every trade, your win/loss ratio should be good and your wins will be at least twice as profitable as your losses.