The trading strategy using Fibonacci levels relies on using retracement or extension levels to identify potential entry and exit points in the market. Here is a simplified and effective strategy:
strategy: trading on Fibonacci retracement levels with momentum confirmation
Required Tools:
1. Fibonacci Levels (Key levels: 23.6%, 38.2%, 50%, 61.8%, 78.6%).
2. Momentum Indicator (like RSI or MACD).
3. Candlestick Patterns (to confirm reversal or continuation).
Execution Steps:
1. Determine the overall trend:
- Use the daily or 4-hour chart to determine the main trend (upward or downward).
- Example: If the trend is upward, look for buying opportunities at price corrections.
2. Draw Fibonacci Levels:
- In an uptrend: Draw from the low to the high.
- In a downtrend: Draw from the high to the low.
- Key levels to focus on: 38.2%, 50%, 61.8%.
3. Wait for the price to reach a Fibonacci level:
- As the price approaches one of the levels (especially 61.8%), look for reversal signals:
- Reversal candlestick patterns (like hammer, engulfing bullish/bearish).
- Confirm with the momentum indicator (like RSI above 30 for buying or below 70 for selling).
4. Entering the trade:
- Buy at 61.8% retracement in an uptrend + bullish reversal candle + RSI exiting the oversold area.
- Sell at 61.8% retracement in a downtrend + bearish reversal candle + RSI exiting the overbought area.
5. Risk Management:
- Stop Loss: Place it below one of the following Fibonacci levels (like 78.6% for buying).
- Take Profit: at the following levels:
- Level 38.2% or 50% from the entry point.
- Or use Fibonacci extension levels (161.8%).
Practical Example:
- Trend: Upward (the price corrects after a rise).
- Entry level: 61.8% retracement.
- Entry signal: Hammer candlestick + RSI rising from 30.
- Stop Loss order: below the 78.6% level.
- Take Profit order: at the 161.8% extension level.
Additional Tips:
1. Avoid trading in sideways ranges: Fibonacci works best in clear trends.
2. Combine with other tools: like trend lines or moving averages for increased confirmation.
3. Test the strategy: on a demo account before real application.
Final Note:
There is no 100% guaranteed strategy, so always use capital management (risk no more than 1-2% of capital per trade).
