DayBreak Fibonacci Retracement – Using Fibonacci Retracement trading techniques in the foreign exchange market, or forex, can lead to a consistent successful trading career since they allow for a precise trading plan and easy money management. Since trade entry and profit targets can be easily determined, and stops can be clearly placed, all trades can have a precise percentage risk. Trading Fibonacci retracements requires some learning, but the technique is not hard to grasp and can be incorporated into other trading styles.
The main advantage is that Fibonacci trading techniques track trends in the markets and give you a clear understanding of whether you should be short or long. Before embarking on explaining Fibonacci trading concepts in depth I want to layout the main advantages I see to trading Fibonacci Retracements.
1. High probability areas to buy or sell currencies.
When you measure price movements with Fibonacci Retracements, you can determine high probability areas where to enter on pullbacks within the greater trend. Fibonacci Retracements, or the golden ratios, at 23.6%, 38.8%, 50% and 61.8% act as turning points in the markets.
2. Retracements give you a clear area to place your stop.
Since Fibonacci retracements are trend instruments, they provide a clear area where the trend has been broken, and hence where to place your STOP. This allows for sound money management and controlled risk per trade. You can guarantee that no more than 1-5% of your capital (according to your rules) will be risked in any single trade.
3. Provide very accurate Profit Targets
By drawing Fibonacci Retracements, very clear profits targets can be placed, according to the price movement being followed. Generally price targets are placed at 123.% and 161.8% of the total move.
4. Very clear trend analysis. The trend is your friend.
You can see the herd moving, by that I mean traders acting collectively. Fibonacci Retracements show when the market is long, short or indecisive, which is incremental to trading decisions. After you draw your setups, it is clear when the market it meeting its targets or when the setups are being broken.
5. Fibonacci Provides different setups according to Strength of Trend
With Fibonacci you can draw Traditional setups, when markets are tending gently, and Extension setups, after the market has made a big move.
6. Large Institutions use them in Program Trading
Computer trading now compromises over 90% of active trading. By analyzing the NYSE tick whilst trading you can see the computer programs entering and exiting at key Fibonacci retracement areas. As a small trader you cannot influence the market so the next best thing is to determine what the big boys are doing. The more large institutions use Fibonaccis for their trading, the more it becomes a self fulfilling prophecy.
7. Fibonacci Retracements Work in Different Time Frames
Depending what kind of trader you are, you can adapt your trading to the appropriate time frames. Fibonacci retracements works just as well on tick charts in heavily traded markets for day traders as they do on daily and weekly charts for longer term swing traders.
8. Complementary With other Forex Trading Techniques
Since Fibonacci Retracements work as a trending indicators, it can complement other trading styles. Fibonaccis are often time used in conjunction with support and resistance lines and daily pivots.
9. Easy to Learn and to Apply. Develop Your Own Trading Style.
This is the most important. The concepts are simple and easy to put into play, so you can focus on practicing and improving your trading. Instead of having to get to grasp with a technique you can put in the hours to get a feel as to how the market reacts to Fibonacci and develop your own simple Fibonacci trading style.
Of course, nothing is perfect in this world. Fibonacci Retracements provide high probability trades but they don’t always work. The market is always evolving and changing and it is important to always get a feel for the market before trading your money. Fibonacci Retracements will however always let you know where you stand in the market and give you the edge you need to become a successful trader.