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## How Not to Use Fibonacci

It may be an incredibly popular tool but not all forex traders are big fans of using Fibonacci, we’re here to take a look at why this might be the case.

What Are We Talking About Here?

This is no guide to using Fibonacci sequences in trading instead, it’s more a look at why some traders turn their noses up to this approach. That said, it doesn’t hurt to have a quick glance at how traders use this tool. Fibonacci numbers form sequences, inventively known as Fibonacci sequences, which are in turn closely related to the golden ratio. This is a phenomenon in mathematics that has been discovered throughout nature and statistical analysis and eventually made its way into different kinds of trading, including forex trading.

The most common use of Fibonacci in forex trading is to use Fibonacci retracement levels to throw up potential support and resistance lines across your chart that show places where the price might bounce back into a reversal. Put simply, the idea is to use these lines to assess where to enter a trade. In its most basic form, when the price is trending, it should retrace its steps occasionally to bounce off a Fibonacci level before it continues its trend and this is supposed to indicate an entry point.

So, What’s the Problem?

As you might have guessed, the growing anti-Fibonacci movement highlights several different problems with this approach.

The first of these is its abstraction. In other words, it is completely divorced from the realities of the market and relies entirely on an abstract pattern to try to locate trade entry points. There is no reason, the naysayers will tell you, why a mathematical sequence that has thrown up patterns in nature would have an effect or even any value for predicting the price movements of a currency pair. And, indeed, prediction is the name of the game here. Because using Fibonacci retracement levels is an attempt to predict future price movements. This is important and we’ll come back to it later in the article.

People who dismiss and reject the applicability of Fibonacci levels are likely to cite other reasons for price movement, including news events, the movements of the herd (that is the activities of the mass of traders who are often to be found trying to do the same thing at the same time), the sometimes pernicious activity of the influential players in the market, and so on. Of course, this has some weight behind – ultimately, there is no real connection between Fibonacci sequences and the movements of the market – the only connection is that Fibonacci levels and other similar approaches are supposed to guide you in analysing large statistical data sets. The price interactions of currency pairs as determined by the market are said to be such a set.

#### 20/20 Hindsight

But there’s a problem inherent in that. This problem becomes particularly apparent when you take Fibonacci levels for a joyride through a historical chart. Choose any currency pair you like and take a look back through its price movements over a long period. Now try to find those times where Fibonacci levels would have been really useful in providing trade signals. The first thing you’ll notice is that the price regularly – and we mean regularly – just blows straight through any Fibonacci levels you care to put up. This is a problem for using it as an indicator of anything really. An indicator that doesn’t work some of the time is one thing, but one that hardly ever works is much more problematic for a trader.

More importantly than that, those times when it does appear to have worked, where the price is trending but then backtracks before bouncing off a Fibonacci line. Those times are, of course, going to be rare. But it’s not just their rarity that is problematic. It’s also the fact that they are often only noticeable when viewed retrospectively like this. In the heat of the moment, before the candles complete, it is much harder to spot a pattern emerging that could be predicted by a Fibonacci retracement. And prediction is important because that’s what this is all about. Using Fibonacci or any other tool in forex trading that fails to reliably predict where the price is going to be in the future is ultimately not just frustrating but also potentially very financially harmful. It’s just no good if somebody comes along and points out that the price of a given currency pair bounced off a Fibonacci line in the past. That’s old news and it’s no good to you. Remember, you have to make a decision while a Fibonacci-like pattern is still emerging… Or not, as the case may be.

#### Where Do You Draw the Line?

Another problem with using Fibonacci levels to trade is that there is no clear way of knowing when to stop using them. That is, when do Fibonacci lines stop being valid? Are you using the levels that are only relevant to the most recent swings (either high or low) or do you incorporate lines from further back? If so, how far back can you go before the lines you drew where the price simply crashed through them are no longer relevant? Or should you try to keep it as simple as possible and reduce the Fibonacci lines across your chart only to the most relevant?

The problem is, there are too many questions and too much of a danger of cluttering your chart with a haystack worth of meaningless lines. Because, if you draw enough lines across a chart, the price will definitely bounce off some of them somewhere but they will also lose all meaning. This fuzziness bothers a lot of traders and they will claim that it is for this reason that their opposite numbers – the traders who are committed to using Fibonacci – are constantly having to adapt their approach. The argument is that they have to keep modifying their approach because, at the end of the day, the Fibonacci levels lack clarity to the point that it becomes impossible to know whether they are working or whether they just look like they might be working.

#### A Little Success…

So why are Fibonacci levels even as popular as they are? Certainly one of the reasons lies in the forex traders’ version of that old saying, “a little knowledge is a dangerous thing” – for forex traders a little success is a deadly thing. Traders often start out by trying to use Fibonacci retracements because they’ve heard so many good things and, if they’re lucky, they might even see some early success in using them. The problem comes further down the road. Because, in the long term, using Fibonacci levels will slowly work less and less well, using them will mean an over-focus on one (potentially very flawed) tool while other tools and opportunities are missed. That early smell of success can be a powerful drug and draws traders into establishing patterns of behaviour that are ultimately harmful.

#### The Curse of Popularity

Of course, it isn’t always someone’s fault if they do give Fibonacci levels a go. The reason they might is that so many people out there on the forex internet are talking about them. Social media is particularly prone to promoting Fibonacci as though it’s the best thing since sliced bread. And there’s a reason for that, which is that posters can come off sounding very smart and knowledgeable indeed if they point out where price is approaching a Fibonacci level. Much rarer, to the point of being non-existent, are accounts that will come back and post an apology, where they say, “Hey, sorry, I said the price was approaching this and this line but it just crashed through as though the line wasn’t there.” Another thing you’ll almost certainly have noticed from forex-related social media accounts is that they will often point out where a Fibonacci retracement has taken place in the past. Unfortunately, this is of no use to anyone actually trying to trade like that because, once it’s happened there’s nothing to do other than appreciate its beauty – if you’re into that sort of thing. No actual use can be gleaned from pointing out historical occasions where a retracement has worked.

#### How to Proceed?

Whether or not you found the arguments in this article convincing is kind of irrelevant. The thing to do with any tool you encounter – whether it’s a popular one that everyone is shouting about from the rooftops or a niche tool you discovered through hard graft – is to test it yourself thoroughly. This is as true of Fibonacci retracements as it is for anything else. In that sense, it might also be useful or fun for you to wait until somebody on social media posts one of those cherry-picked examples of a Fibonacci retracement coming off perfectly and then go back and see if you can figure out what levels they were using.
If you do remain unconvinced and intend to carry on using Fibonacci approaches to trading, there is one other very important thing to be aware of. Those traders who have committed to this discipline and have made it work to one extent or another have done so by combining Fibonacci with a carefully selected set of other technical analysis tools. So, if you do plan to use Fibonacci retracements, make sure that you are ready to do so in a coordinated approach that also relies on other indicators and tools to help you assess whether your Fibonacci-based hunch is really likely to turn into the price movement you were hoping for.

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In today’s lesson, we are going to demonstrate an example of a chart where the price makes a bullish move from 78.6% Fibonacci level. The 78.6% Fibonacci level often makes the price reverse towards the trend’s direction. In today’s example, the price produces a Morning Star and heads towards the trend’s direction with good bullish momentum. Let us see how it happens.

It is an H4 chart. The price produces double bottom and heads towards the North with good bullish momentum. On its way, it produces only a single bearish candle. The buyers are to wait for the price to make a bearish correction and to get a bullish reversal candle to go long with a good risk-reward in the pair.

The chart produces a bearish inside bar. Then, it produces one more bearish candle. Look at the last candle. It comes out as a doji candle. It seems that the price may have found its support. A strong bullish reversal candle may attract the buyers to go long in the pair and push the price towards the North to make a new higher high.

The chart produces a bullish engulfing candle. The combination of the last three candles is called Morning Star. This is one of the strongest bullish reversal patterns in the Forex market. The buyers may trigger a long entry right after the last candle closes. They may set stop loss below the signal candle’s lowest low. We’ll find out the take-profit level in a minute. Let us first see how the trade goes here.

The price heads towards the trend’s direction with extreme bullish momentum. The last candle comes out as a bearish inside bar. It may make a bearish correction now. Some sellers may close their trade manually after the last candle. You may notice if they do that, they lose a few pips. How about if we knew that the price may make a bearish reversal from here before the last candle is produced. Yes, it is possible by using Fibonacci levels. Let us draw Fibonacci levels on the chart.

The chart shows that the price trends from 78.6% level. When the level of 78.6% makes the price move, it usually makes a reversal at 138.2%. Thus, if we set our take profit at 138.2%, we do not have to wait to get a bearish reversal candle to close our trade manually. It saves our time and gets us more pips too. This is why Fibonacci (extension/ retracement) is called a magic trading tool, since it helps traders in taking and exiting with precision.

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In today’s lesson, we are going to learn an intraday trading strategy using the previous day’s highest high or lowest low. When the price makes a breakout at yesterday’s highest high or lowest low, the price usually trends towards the breakout direction. In today’s lesson, we are going to demonstrate an example of a bearish breakout. After making a bearish breakout at the previous day’s lowest low, the price consolidates and produces a bearish engulfing candle at a significant Fibonacci level. Then, it heads towards the South with good bearish momentum. We try to find out the Fibonacci level where the price trends from as well as the take profit level where the price may make a reversal. Let us proceed.

This is an H1 chart. The chart shows that the price makes a bearish move by producing an ABC pattern. The last candle closes the trading session at the lowest low of the day. The next chart shows that the price consolidates around the lowest low of the previous trading day and makes a good bearish move.

The chart suggests that it becomes intraday sellers’ territory. The sellers may look to go short in the pair. The question is how and when. Let us find these two answers.

The last candle comes out as a bullish candle. Since the chart has been bearish, the sellers may wait for the chart to produce a bearish reversal candle to go short below consolidation support. Here is another equation that they must consider. We will find that out in a minute.

The chart produces a bearish engulfing candle. The sellers may trigger a short entry right after the last candle closes. A question may be raised here that the chart produces a bearish engulfing candle earlier right at the breakout level. We have not concentrated on that to go short from there. However, we have planned to go short right after the last candle closes. What are the reasons behind this? Let us find out how the price reacts after the last candle is produced.

The price heads towards the South with good bearish momentum. The chart produces a bullish reversal candle. It may change its trend or make a bullish correction, at least. For intraday traders, they cannot afford to wait as many pips by waiting to get a bullish reversal candle. They are to close the trade right after the last bearish candle. The question is, how would they know that they should set their take profit at that level?

The answer is Fibonacci levels. Do you remember I was talking about the level for the price to resume its bearish move, we find that out by Fibonacci levels as well. See, the chart produces a bearish engulfing candle at the level of 61.8%, and it hits 161.8%. These are two levels intraday traders must count when a pair trades below the previous day’s lowest low or vice versa. Stay tuned for more lessons for intraday trading with Fibonacci levels.

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## Fibonacci Trading: A Reversal Candle is to be Followed by a Good Signal Candle

In today’s lesson, we are going to demonstrate an example of an H1-15M chart, which made a good bullish move upon producing a bullish reversal candle at a key Fibonacci level. The H1 chart produces an H1 bullish engulfing candle earlier, but the price does not head towards the North. It takes time then produces another bullish reversal candle. It then heads towards the North with good bullish momentum. We try to find out why it does not make a bullish move at the first attempt but makes it at the second.

This is an H1 chart. The chart shows that the price makes a good bullish move and then makes a bearish correction. It consolidates for a while at a level of support and produces a bullish engulfing candle. The H1-15M combination traders may flip over to the 15M chart to trigger entry upon getting a 15M bullish candle. Let us find out what happens next.

This is the H1 chart too. The chart shows that the price produces a bearish engulfing candle instead. We have not flipped over to the 15M chart yet. Let us find out how the 15M chart looks.

This is the 15M chart. The chart shows that the price does not produce any bullish candle closing ahead of the H1 bullish reversal candle. Thus, the price heads towards the South. The last candle comes out as a bearish engulfing candle in the 15M chart. It does not look good for the buyers anymore.

The price consolidates with more candles. The last candle comes out as a bullish engulfing candle again. The chart produces the candle at the same level. The combination traders may flip over to the 15M chart again to look for entry. Let us find out what the 15M chart produces this time.

This is how the 15M chart looks. The buyers may wait for a 15M candle to close above the last H1 candle’s close. The chart suggests that the level of support is a strong one, which may push the price towards the North with good bullish momentum.

The last candle comes out as a bullish candle closing above the last H1 candle’s resistance. The buyers may trigger a long entry right after the candle closes by setting stop loss below the level of support. We find out the level take profit with the help of Fibonacci levels.

See how the price moves towards the North. The price makes a bullish move and makes a new higher high. It makes a bearish correction and then heads towards the North again. Let us draw the Fibonacci extension on the chart.

The Fibonacci level shows that the price hits 161.8%. It goes even further up. It makes a bearish correction before producing the last wave. The level of 100% works as a level of support.

We have seen how important it is that the 15M chart produces a bullish continuation candle to offer an entry. At the first reversal, the price does not head towards the North since the chart does not produce any 15M bullish continuation. On the second occasion, it produces  a bullish continuation, and the buyers find an opportunity to go long and push the price towards the magic Fibonacci level of 161.8%

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## Fibonacci Levels: How Much Does 50% Level Influence the Market?

In today’s lesson, we are going to demonstrate an example of a chart, in which the price makes a reversal from 50% Fibonacci level. We know if the price makes a reversal from 61.8%, it usually goes up to 161.8%; if it makes a reversal from 38.2%, it goes up to 138.2%. In both cases, traders get good risk-reward. Do you ever wonder what happens if the price makes a reversal from 50%? Let us find this out through an example.

The chart shows that the price heads towards the South with good bearish momentum. It produces two bullish candles and heads towards the South. Look at the last candle. It comes out as a bullish inside bar. It makes a bullish correction. However, the sellers may wait for a bearish engulfing candle to go short in the pair.

The price has been in a bullish correction. It produces some bearish reversal candles, but it does not create any bearish momentum. The last candle comes out with a little bullish body having a long upper shadow. Let us proceed to the next chart to find out what happens next.

The last candle comes out as a bearish engulfing candle. It is a strong sign that the price may head towards the South again. The sellers may flip over to the minor chart to trigger entry.

The price heads towards the South with extreme bearish pressure. The last candle comes out as a bearish Marubozu candle. It seems that the price may continue its bearish journey towards the South further. Let us find out what actually happens.

It does not continue its bearish journey. It finds its support. Upon producing a hammer, it heads towards the North with one more bullish candle. It seems that it may continue its bearish journey considering bearish engulfing candle as a reversal candle. Next, two candles come out as strong bearish candles too. What may be the reason that the price makes a bullish reversal here? Let us find this out with Fibonacci levels.

If we calculate, we find that the price makes a bearish reversal from Fibonacci 50% level. It then heads towards the South with extreme bearish momentum. However, it finds its support at the Fibonacci 100.00 level. Usually, this is what happens when the price trends from the 50% level. A question may be raised here whether we should take entry if the price trends from the 50% Fibo level. It depends on risk-reward. If it offers a good reward, then we may take an entry. In most cases, it does not offer a good reward; thus, we may skip taking those entries.

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## Tweezer Top/Tweezer Bottom and Fibonacci Levels

In today’s lesson, we are going to demonstrate an example of a Tweezer Top forming at a significant Fibonacci level. We’ll find out the impact of a tweezer top in the chart. Let us get started.

The chart shows that the price has a rejection at a level of resistance twice. At the second bounce, it produces a doji candle. A doji candle is not considered a strong reversal candle. If the next candle comes out as a bearish engulfing candle, the sellers may keep their eyes in the pair to look for short opportunities.

The next candle comes out as a bearish engulfing candle. It makes a strong statement that the bear has taken control. Double top support, along with a bearish engulfing candle, usually attracts more sellers to look for short opportunities.

The price consolidates and finds its resistance. The chart produces a bearish engulfing candle. The sellers may go short right after the last candle closes with 1R. Let us proceed to the next chart to find out how the entry goes.

The chart shows that the price heads towards the South with good bearish momentum. It hits 1R at a moderate pace. It finds its support again and heads towards the North to make a bullish correction. Look at the last two candles. The first candle comes out as a bullish candle, and the last candle comes out as a bearish candle, both having a long upper shadow. The combination of these two candles is called “Tweezer Top”. Tweezer Top is considered one of the strongest bearish reversal patterns. Those two upper shadows suggest that the price has a strong rejection at the level of resistance. The bearish body of the last candle suggests that the bear may take over. Another point we may consider whether it is produced at a significant level or not. By drawing the Fibonacci extension, we may find this out. Let us draw Fibonacci extension and find out how far the price travels towards.

We see that Tweezer Top is formed right at the 61.8% level. Usually, the 61.8% level drives the price towards the level of 161.8%. This is what happens here, as well. The price hits the level of 161.8% within the next candle.

We know how handy drawing Fibonacci level can be in trading. Especially, 61.8% and 38.2% level plays a very significant role in driving the price with good momentum. If we get a strong reversal pattern such as Tweezer Top or Tweezer Bottom, it adds more pressure. Thus, the traders do not have to wait long to achieve their target.

## Introduction

In our previous educational article, we reviewed how the identification of double top and double bottom formations could provide a trading setup, which, according to its technical configuration, returns a risk to reward ratio equivalent to 1:1.

In this educational article, we’ll review the use of Fibonacci retracements and extensions to generate trading signals.

Trading based on corrective movements has its origin in the idea that when the price action makes an impulsive move, the market develops a corrective movement before continuing to develop a new motive move.

This method’s risk derives from the possibility of false breakouts, which, depending on the primary trend, could be a “bearish trap” or “bullish trap.”

Considering that there is a broad range of Fibonacci ratios, Fischer & Fischer propose filtering the trading volume using the 61.8% level as a conservative level. The use of 61.8% provides the technical trader the possibility to invest risking a reduced part of its capital.

As a second entry filter criteria, traders could use the swing size average of the asset under analysis. Considering that every financial asset holds a different personality and volatility, this filter demands the technical trader to develop statistical backtesting to understand the asset’s inherent volatility under study.

Entry Setup: Considering that the entry rule requires a unique Fibonacci level, the entry will occur once the price touches and closes above (or below) the level 61.8%. This criterion could help shield the technical investor against a potential false breakout.

Stop-Loss: The trade invalidation level will be set above/below the last peak/valley preceding the entry-level. The benefit of trading using the 61.8% level as the point of market entry is the reduced risk compared with other typical Fibonacci levels, such as 38.2% or 50%.

Trailing Stop as Profit Protector: This method by itself doesn’t make the use of a profit target level. As an alternative, the use of a trailing stop could help protect profits with a trailing criterion of the last peak or valley. The disadvantage of this method is that, constrained by the volatility observed in the real market, it is unlikely that the resulting risk to reward ratio goes beyond a mere 1:1.

As the Elliott Wave Theory states, the price tends to advance in three or five waves. This method uses Fibonacci extensions to define target levels.

In general, when the price action develops a price movement on strong momentum and, then, its correction doesn’t violate the starting level of the initial move, it means the market is not building a bullish or bearish trap; thus, it is likely the action will continue progressing in the direction of the first move.

Entry Rule:  In the same way as in the case of a price correction setup, the entry should be set when the price retraces and closes, starting a new impulsive move. This condition doesn’t require that the price retraces to the 61.8% level of the initial movement.

Stop-Loss: The invalidation level of the trade setup should be located below the last peak or valley preceding the entry-level.

Profit Target (Three Movements Case): When the price evolves following a three-move sequence, the profit target should be set at 161.8% of the projection of the first sequence, as illustrated in the next figure.

Profit Target (Five Movements Case): This scenario considers two options. The first one is when the progress happens in the third segment and the second one when the price action has completed the third move and could be initiating its fifth movement. These scenarios are illustrated in the following figure.

## Conclusions

In this educational article, we reviewed two cases in which to use as Fibonacci retracements as the extensions tool. Both methods presented in this article offer specific risks. The use of the corrections method provides a reduced risk to the technical trader, due to the trailing stop use criterion, this doesn’t mean that it could deliver a risk to reward ratio of over 1:1.

On the other hand, the use of the Fibonacci extensions, according to Fischer & Fischer, always means to invest against the trend. However, a combination of both methods could provide an opportunity to enter in favor of the market direction.

To reduce the noise and risk in the investment process, the technical trader must evaluate the performance strategy developing statistical backtesting with historical data before risking real money.

• Fischer, R., Fischer J.; Candlesticks, Fibonacci, and Chart Patterns Trading Tools; John Wiley & Sons; 1st Edition (2003).

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## It is Not Always the Level, It is about the Zone

In today’s lesson, we are going to demonstrate an example of a chart where the price makes a strong move from the 61.8% Fibonacci level. However, in this example, things are slightly different. We know the world is not perfect; neither is the Forex market. Today’s lesson is going to show that. Let us get started.

The chart shows that the price makes a strong bearish move. After that, the price may have found its support. The last candle comes out as a bearish candle with a long lower shadow. The price may make a bullish correction and, then, a bearish breakout at the lowest low of the wave to offer a short entry.

The price makes its bullish correction. Upon producing a doji candle followed by a bearish Marubozu candle, it heads towards the South. The last candle closes within the level of support, where the price gets a rejection earlier. The sellers are going to eagerly wait for a bearish breakout.

The price makes a breakout at the lowest low of the wave, consolidates, and produces a bearish reversal candle. The sellers may trigger a short entry right after the last candle closes by setting Stop Loss above consolidation resistance. We talk about Take-profit in a minute. Let us find out how the entry goes.

The price heads towards the South with extreme pressure. It seems like the Bear is in a real hurry to hit the target. It produces only one bullish candle before the last one. The last candle comes out as a bullish inside bar. Typically, it suggests that the chart is still bearish biased. We find that out whether it really is or is it time for the sellers to come out with their profit. Let us draw Fibonacci levels.

Here it is. Despite producing an inside bar, the price heads towards the North for a bullish correction. It may change the trend as well. The reason for this is the price hits 161.8%. Typically, the price makes a reversal once it hits 161.8% of an existing trend when the trend starts from 61.8%. The question is whether the price really trends from 61.8% or not? If you closely look at the chart, the price does not hit 61.8%, but it trends from well below. Nevertheless, it trends from the zone of 61.8% to 78.6%. As long as the price trends from that zone, the Fibonacci traders consider that it trends from 61.8%. This is what makes the price behave as if it trends right from the  Fibonacci level of 61.8%. When it trends from there, we know where to set our Take Profit. Yes, it is to be set at 161.8%.

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## How to Use Fibonacci Levels in the H1-15M Combination Trading

In today’s lesson, we are going to demonstrate an example of an H1 chart offering an entry. We find out how Fibonacci levels and 15-min chart help us take the entry. Let us get started.

This is an H1 chart. The chart shows that the price after making a strong bearish move has been making an upward correction. The chart produces a Shooting Star and creates a bearish momentum. However, the sellers are to wait for the chart to make a breakout at the lowest low of the wave. Let us proceed to the next chart to find out what the price does next.

The price keeps driving towards the South and makes a breakout at the lowest low. The breakout candle has a long lower shadow, but it closes well below the level of support. The H1-15M combination traders may flip over to the 15M chart now.

This is how the 15M chart looks. The last candle comes out as a bullish candle. The sellers are to wait for a bearish reversal candle to go short in the pair. They must concentrate hard on the chart. It is waiting time for the sellers.

The 15M chart produces a bearish reversal candle. The candle has a long lower shadow but has a thick bearish body. Moreover, the H1 chart makes a breakout, so a 15M bearish reversal candle means a lot to the sellers. The sellers may trigger a short entry right after the last candle closes. There is another equation, which we will reveal in a minute. Let’s now find out how the trade goes.

The price heads towards the South with good bearish momentum. The 15M chart shows that it consolidates now and then. The H1 chart should look much more bearish than this. Ok, here is the equation we have pointed out a bit earlier. Let us draw Fibonacci levels and find out how it may help us set our stop-loss and take-profit levels.

The Fibonacci levels show that the price trends from the level of 61.8%. It makes a breakout at the level of 100.0 and heads towards the level of 161.8. When the price trends from 61.8%, it creates an extra momentum. This is what this example shows, as well. With Fibonacci, we know where to set the take-profit level. Yes, it is to be at 161.8%. With stop-loss, you may set it above 61.8% if you are too defensive a trader. If you want to be too tight with your stop loss, you may set it between 78.6% to 100.0%. The first one offers less risk-reward, but it has a higher winning percentage. On the other hand, the second one offers excellent risk-reward but has less winning percentage. The choice is yours.

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In today’s Fibonacci lesson, we are going to demonstrate an example of a chart, which makes a bearish move. We dig into the charts and find out how we can take an entry based on Fibonacci levels and how the levels may help us giving clues to execute our plan. Let us get started.

The above figure shows an H1 chart. The chart shows that the price makes a bearish move at a moderate pace. It seems that the price finds its support. It has been having consolidation around the level of support having bounces three times. The last candle in this chart comes out as a bullish Marubozu candle. This may push the price towards the North. However, the sellers may still have the hope that they may get a bearish breakout here. Let us proceed to the next chart to find out what the price does.

The chart produces a bearish engulfing candle breaching the level of support. The pair trades for two more candles after the breakout. An important point is to be noticed here that the price is having an upside correction after the breakout. Sometimes price keeps trending after a breakout, whereas sometimes price makes the correction. Fibonacci levels have an important role to play in this. Thus, if we use Fibonacci levels, we are able to find out whether the price trends or makes correction well ahead. Let us now find out how we take the entry. We are to flip over to the minor chart. Since this is an H1 chart, we may flip over to the 15 M chart to trigger the entry.

Look at the arrowed candle. The candle comes out as a bearish Marubozu candle forming track rail. The candle is formed right at a flipped resistance. A short entry may be triggered right after the arrowed candle closes. The chart also shows how the price heads towards the South after the signal candle. Let us now see the H1 chart with Fibonacci levels.

The chart shows that the price trends from 78.6% level. Thus, it may reverse at 138.2%. It hits 161.8% here. However, we may set our target at 138.2% if the price trends from 78.6% to be safe. The Stop Loss may be set here above 100.0 Fibonacci level.

These are the things we must remember when we trade a chart trending from a 78.6% level.

1. The price may make a reversal at 138.2.
2. If the price trends from 78.2%, it most probably makes a correction after the breakout. Otherwise, it does not give a good risk-reward as well.

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## Determining Higher Highs or Lower Lows to Draw Fibonacci Levels

Fibonacci levels are obtained by using higher highs or lower lows. A chart may have many higher highs/lower lows. Thus, Fibonacci levels can be obtained at different levels. A trader may find it difficult to spot out the levels where the price may react. In today’s lesson, we are going to see how different higher highs may lead us to having Fibonacci levels where the price does not react.

This is an H1 chart. The price heads towards the North with good bullish momentum before making a bearish correction. The point can be used to draw Fibonacci levels. The price then makes another bullish move and makes a new higher high. Some traders may want to use the last higher high to draw their Fibonacci levels. To make it clear, look at the chart below.

Some traders may use AB, while some others may use AC to draw Fibonacci levels. These two arms point out Fibonacci levels at different levels. Let us assume that we draw our Fibonacci levels by using AC.

The chart shows that the price after making the last higher high has started having a bearish correction. The buyers are to wait for the price to come at 78.6% level and make a breakout at the level of 100.0 to offer them a long entry. If the 78.6% is breached, 61.8% may do the same and offer them an entry as well. Let us proceed to the next chart to find out what happens next.

The price does not even come at 78.6%. It heads towards the North and makes a breakout at the level of 100.0. The price then never looks back. It hits the level of 161.8% in a hurry. The Fibonacci buyers do not find an entry here since the price does not trend from a 78.6% level. It trends way above the level of 78.6%.

Let us draw the Fibonacci levels with AB arm.

If we draw Fibonacci levels by using AB, we see that the price trends from 78.6% level. One candle breached through the level, but the next candle closes well above the level of 100.0. The buyers may set their target around 138.2% since it trends from 78.6%. However, it goes up to 161.8%.

To sum up the lesson, Fibonacci traders are to be well calculative at the time of selecting the first arm. With AC, there is no correction. The price trends towards the North straight. With AB, the price makes a correction and then makes another bullish move. Usually, a straight arm works well and provides accurate Fibonacci Fibonacci levels. Over here, we have seen that AB provides the Fibonacci levels, where the price reacts and help the buyers take a trading decision.

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## Fibonacci Trading: Be sure whether the Level is Held or Breached

Breakout plays a very vital role in the Forex market. Traders use breakout, breakout levels to make a trading decision. Fibonacci traders are to make sure whether a particular level is breached or it holds the price to make a better trading decision. In today’s lesson, we are going to demonstrate an example where Fibonacci traders may need to concentrate more to be sure about the Fibonacci level from where the price trends. Let us get started.

This is an H1 chart. The chart shows that the price makes a strong bearish move. It makes an upside correction followed by a strong bearish move again. The price has been having an upside correction again. Fibonacci traders are to draw the Fibonacci levels in the chart to find out where the price makes a bearish reversal and how far it may go up to.

Here are the levels. The chart shows that the price produces a bearish engulfing candle and heads towards the South with good bearish momentum. The question is whether the price trends from 78.6% or 61.8%. It is a vital issue since the price heads towards either 138.2% or 161.8% based on these two levels. If we concentrate on the chart, we see one of the bullish candles closes above the 78.6% level. However, the price comes back within the 78.6% level with the next candle. This means the H1 chart does not make a bullish breakout at 78.6%. The sellers may plan their entries to go short up to 138.2% in this chart. Let us proceed to the next chart to find out what price does.

The price breaches the 100.0 level and trades below for several candles. The sellers may wait for a bearish reversal candle and go short in the pair as long as they are satisfied with the risk-reward factor. Usually, it is best if the price goes back to the 100.0 level and produces a bearish reversal candle around the level as far as the risk-reward ratio is concerned. However, it may be produced anywhere between 100.0% to 123.6%. The sellers with different strategies may set their stop loss at different levels, but their last take profit level is to be set at 138.2 %. Let us proceed to the next chart to find out what the price does next.

The chart shows that the price hits 138.2%. As expected, it has been roaming around the level. It seems that the price may have found its support around 138.2% level, and it may make a bullish reversal. The sellers with Fibonacci levels have completed their mission with perfection.

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## Fibonacci Trading: When Momentum is Lacking

Traders wait for the price to trend from 61.8% Fibonacci level. This is what attracts more traders to trade, which generates good momentum. When the price trends from 61.8% level, it usually goes up to 161.8%. Since the price gets enough space to move, it offers better risk-reward. This is another reason that Fibonacci traders love to trade in a chart when the price trends from 61.8%. However, the Forex market is uncertain. We may see that the price does not head towards 161.8% with good momentum upon trending from 61.8% from time to time. In today’s lesson, we are going to demonstrate an example of this.

This is an H1 chart. The chart shows that the price heads towards the South with good bearish momentum. Upon producing a strong bearish candle, it starts having a bullish correction. Fibonacci traders shall get themselves ready by drawing Fibo levels on the chart to find out potential short opportunities in the pair.

Here it is. The chart shows that the price breaches 78.6% level and trades above the level for two more candles. This means the price is in 61.8% zone. If the price trends from here, it may go towards 161.8% level. Yes, it would be better if the price goes towards the North and trends right from the level 61.8%. Nevertheless, the sellers still are to count the move from 61.8% zone. The chart produces a bearish engulfing candle followed by a doji candle. Since the reversal candle comes out as a bearish engulfing candle forming from 61.8% zone, some sellers may trigger a short entry (some may wait for the price to breach the last lowest low). Let us proceed to the next chart to find out what the price does.

The price heads towards the South and it makes a breakout at the last swing low as well. The pair may get more short orders now. However, the price does not head towards the South. It seems that 161.8% level is far away for the price to reach. It does not usually happen but this is how the Forex market runs. It does not always run on a single equation. A question may be raised here what does a trader do with his entry? Since it is an H1 chart based entry, it must be left behind and let it decide its fate by setting Stop Loss and Take Profit accordingly.

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In today’s lesson, we are going to demonstrate a chart where the price makes a strong bearish move from a Fibonacci level. It has two messages, which we will find out soon. Let us get started with the chart’s price action.

The chart shows that the price makes a strong bearish move. The last candle comes out as a long bearish candle, which states that the sellers dominate over the buyers. Traders may want to wait for the price to make a bullish correction to go short in the pair with more aggression.

The chart produces a bullish inside bar. The sellers are to keep their eyes on the pair to get a bearish reversal candle to go short. It seems that the pair may produce a strong bearish reversal candle (the signal candle) soon.

The chart produces a bearish inside bar, which is not the sellers’ favorite to go short. The price makes a little bearish move and heads towards the North again. Look at the last candle in the chart. It comes out as a bearish engulfing candle, which is one of the strongest bearish reversal candles.

As expected, the bearish engulfing candle drives the price towards the South. The sellers on the minor chart are going short. Thus, the price is about to make a breakout at the last swing low on the chart as well.

The price makes a breakout at the last swing low and heads towards the South further. Then, it produces two bullish candles in between but continues its bearish journey again. The price may have found its support since it produces four consecutive bullish candles. The price may continue its bearish journey, or it may make a bullish reversal. The bull looks good here. Let us draw Fibonacci levels and see whether it gives us a clue about the trend continuation or a reversal.

The chart produces a bullish inside bar right at 138.2 level. Please note that the price makes its bearish move from 78.6 level. The level of 78.6 has a strong relation with 138.2. If the price trends from 78.6, it often makes a reversal at 138.2. This is what happens here.

To sum up, if we learn the art of using Fibonacci levels and understand how a level is related to others, it becomes easy for us to take trading decisions such as entry, exit, and taking a partial profit. In the end, it makes us prolific traders.

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## Fibonacci Trading and Deeper Correction

In today’s lesson, we are going to demonstrate an example where the chart produces a reversal candle at a Fibonacci level, but the price does not head towards the trend’s direction. It then makes a deeper correction. It finds its new resistance and heads towards the trend’s direction with good momentum. Let us now have a look.

The price heads towards the South with excellent bearish momentum. It produces six consecutive bearish candles, four of them having solid long bearish bodies. The sellers are to wait for the price to make a bullish correction and to produce a bearish reversal candle at the value area. Let us proceed to the next chart.

The price makes a bullish correction and produces a bearish engulfing candle. However, the price does not make a bearish breakout. It rather goes towards the North again. The last two candles come out as bullish candles. The price goes towards the North further for a deeper correction.

The chart produces a bearish Marubozu candle. The combination of the last two candles is called Track Rail. The Track Rail is one of the strongest reversal signal candles. The sellers may keep their eyes on this chart with attention. The Fibonacci traders may draw their Fibonacci levels to find out which level it is trending from.

Let us proceed to the next chart to find out what the price does.

The chart produces another bearish candle and makes a breakout at the wave’s lowest low. The Sellers then take control of the pair and drive the price towards the South at an extreme pace. The last candle on this chart comes out as an inverted hammer. It suggests that the price may keep heading towards the South. However, do not forget that the chart produces a bullish Pin Bar as well, and the last candle closes within the level of support where the Pin Bar bounces off.

Anyway, let’s draw the Fibonacci level on the chart and see how the price reacts to some levels.

The chart gives us a clearer picture. At first, the price produces the bearish reversal candle at 78.6. The asset does not make a breakout. Instead, it goes towards the North and finds its resistance at 61.8. The level produces a bearish reversal candle followed by a breakout at the wave’s lowest low. The price then hits 161.8 level with ease.

If the price makes a breakout by trending from 78.6, it may not hit 161.8 level. The price usually reverses at 138.2 if it trends from 78.6. Stay tuned. We are going to study with some live examples on this soon.

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Fibonacci levels and price action around those levels give traders clue what they should do with their potential trade setup. The 61.8% level is the most significant level, which is paid attention by the traders to make a trading decision. The price usually goes towards the level of 161.8% when it trends from 61.8%. Since it creates enough space for the price to travel, different traders trade and make use of the wave-length in differently.  We will learn some other strategies that are integrated with Fibonacci levels. Meanwhile, let us demonstrate an example of a chart where the price reacts at 61.8% and trends towards 161.8% afterwards.

The chart shows that upon producing a double bottom, the price heads towards the North and makes a new higher high. The buyers are to wait for the price to make a bearish correction now.

The price heads towards the South upon producing a bearish inside bar. The last candle comes out as a bearish engulfing candle closing within a flipped support. Let us wait and see whether the level produces a bullish reversal candle.

The price produces three bullish candles at the flipped support. The last candle looks to be the strongest one. The price may head towards the North and makes a breakout at the highest high of the wave.

As expected, the price heads towards the North and makes a breakout at the highest high of the wave. The price continues its journey towards the North further. The last candle on the chart comes out as a bullish candle having a long upper shadow. Do you notice anything interesting here? Look at the next chart.

The price after making a bullish move, it starts having a bearish correction. The price consolidates around the 61.8% level. It produces a hammer and heads towards the North. It makes a breakout at the last highest high and heads towards the North with good bullish momentum. The price hits 161.8% as it usually does when it trends from 61.8% level.

Some traders go long in this chart before the price makes the bullish breakout. As long as 61.8% level produces a strong reversal candle, they trigger their entry. It provides an excellent risk-reward but less winning percentage. On the other hand, some traders trade once the price makes a breakout. This offers not that great a risk-reward but an excellent winning percentage.

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Fibonacci traders are to find out a good move, followed by a price correction. They keep their eyes on the 61.8% level with extreme attention. If the level of 61.8% produces a reversal candle, traders trigger for entry. Usually, the price goes up to the level of 161.8% if the price trends from 61.8%. This allows an excellent risk-reward to the traders as well. In today’s article, we are going to demonstrate an example of how the golden ratio of 61.8% plays such an important role in moving the market towards the trend. Let us get started.

The chart shows that it makes a bullish move upon producing a bullish engulfing candle. The price makes a downside correction and moves towards the North again. This time the price makes the move with good bullish momentum. The Fibonacci traders are to wait for the price to make a downside correction and draw Fibonacci levels to go long in the pair. Let us proceed to the next chart to find out whether it starts having downside correction or heads towards the North further.

This is an interesting move by the chart. It has a bearish gap, but the candle comes out as a bullish candle. Despite having an upper shadow, this is a bullish reversal candle. Let us find out how the price reacts upon getting such a bullish reversal candle.

The price heads towards the North with extreme bullish momentum. The bull outplays the bear. This is such a strong bullish move that the buyers would love to make full use of it. Do you notice something interesting? Yes, the price trends from the 61.8% zone. Let us draw the Fibonacci levels and see how it looks.

The chart shows that despite having a bearish gap, the chart produces a bullish candle within 61.8% zone and heads towards the North. It hits the level of 161.8% in a hurry as well. This is what the Fibonacci golden ratio level does almost all the time. There are different ways of trading and catch such a move. Some traders enter before the breakout, while some enter after the breakout at the highest high of the wave. Both have merits and demerits, which we will learn in our forthcoming Fibonacci lessons. Meanwhile, concentrate on your chart and practice drawing Fibonacci levels by pointing out the highest high and the lowest low. Start practicing this, so you get well acquainted with Fibonacci significant levels and how the price reacts to them. This will help you trade much better soon.

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## Fibonacci Trading: The Golden Ratio

Fibonacci trading is one of the most prolific trading methods, which is widely used by Forex traders. Retracement length, Fibo levels as well as reversal candle are three factors that Fibonacci traders need to pay attention to. In today’s article, we are going to demonstrate an example of a chart, which makes an excellent bearish move after having a retracement. The length of retracement, the most significant Fibo level, and the reversal signal all play their part in this example. Thus, fasten your seat belt and read through.

The chart shows that it makes a strong bearish move and makes a breakout at long-held support. The price heads towards the South, searching for its support. The sellers are to wait for the price to have a retracement.

The price starts having retracement. It produces a bullish inside bar followed by another bullish candle. The sellers are to wait for the price to find its resistance and produce a bearish reversal candle. However, the Fibonacci traders are to wait for the price to produce a bearish reversal candle at a very particular level, which is the 61.8 level.

The chart produces a bearish engulfing candle closing well below the last bullish candle. The Fibonacci traders must draw the Fibonacci retracement levels to find out which level produces this reversal candle. If this is the level of 61.8, the Fibo sellers are going to go short in the pair.

The highest high is the level of 0.00, and the lowest low is the level of 100.0. The price has a retracement and produces a bearish engulfing candle right at Fibo level 61.8. Usually, when the level of 61.8 works as support/resistance, it drives the price towards the level of 161.8. This means the price may head towards the South and hit the level of 161.8 next. Let us proceed to the next chart and see what the price does here.

The price hits 161.8 level. It makes an upward correction on its way. However, it reaches the level at last. The last candle shows that it breaches the level of 161.8. The price may head towards the South further.

The level of 61.8 is called the Golden ratio. It is a super significant level as far as Fibonacci Retracement is concerned. The buyers in a buying market and the sellers in a selling market wait for the price to produce a reversal candle/signal candle to go long/short in a pair. Yes, there some equations for the traders to know and obey to be able to trade with Fibonacci retracement. Once they learn them well, Fibonacci trading can make them a handful.

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## Fibonacci Retracement: A Magic Trading Tool

Financial traders rely a lot on a tool called Fibonacci Retracement. This shows the percentage of retracement that the price makes after making a strong bullish/bearish move. The percentage of retracement is very significant to the traders. There are some particular levels, where the price reacts heavily and creates a new trend. Thus, financial traders use Fibonacci Retracement tool to measure retracement length and find the potential whether it is going to create a new trend or not. The Forex traders love using the Fibonacci Retracement tool as well. Once we know how to draw it on the chart accordingly, we find out that the currency pairs on almost all the timeframes obey the Fibonacci retracement ratio.

Leonardo Fibonacci, an Italian mathematician, identified a series of numbers such as 0, 1, 1, 2, 3, 5, 8. 13, 21, 34, 55, etc. Each number is the sum of the preceding two numbers.  These numbers produce some significant ratios, such as 23.6. 38.2, 50, 61.8. 78.6, 100, 123.6, 138.2, 161.8. These ratios and the Fibonacci sequence are found in nature as well. Thus, people love using the sequence ratios in their design and plan. At the end of the day, people run financial markets. They buy or sell at certain levels. Since Fibonacci ratios are much related to our nature and life, traders love using these ratios to help decide where to buy and where to sell.

As far as Fibonacci ratios are concerned, the 61.8 is considered as the golden ratio. It is found in flower petals, seed heads, pinecones, fruits and vegetables, tree branches, shells, spiral galaxies, hurricanes, fingers, animal bodies, reproductive dynamics, animal fight patterns, DNA molecule, etc.

In the financial/Forex market, the ratios are used by using a tool called Fibonacci Retracement. There are other Fibonacci tools, but this one may be the trader’s most favorite.

In a buying market, a trader draws his Fibonacci retracement levels from the lowest low to highest high.

The level of 00.00 is the lowest low, and the 100.00 is the highest high of a bullish wave. Traders are to wait for the price to make a bearish retracement. All these levels are significant, and the price reacts to these levels. However, the buyers pay more attention when the price is around 61.8 level to go long in a pair.

In a bearish market, it is just the opposite. Let us have a look at how it looks like.

Fibonacci Retracement levels help traders spout out the trend’s initiating point. Thus, it becomes easy for the traders to take entry with excellent risk-reward. In our forthcoming articles, we are going to demonstrate charts on different pairs, time frames to find out how the price reacts to different Fibonacci levels. Stay tuned.

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## How to Use Retracements to Analyze Waves – Part 5

Until now, we studied different scenarios for the retracement of W2 when it is lower than 100% of W1. In this educational article, we’ll review what to expect when the retrace experienced by W2 is higher than 100% of W1.

## The Fifth Rule

The fifth rule surges when the price runs in wave two (W2) and its progress extends between 100% and 161.8% of the first wave (W1).

In this case, could exist four possible conditions as follows.

Condition a: this condition occurs if W0 is lower than 100% of W1. As a first scenario, W1 could be part of a corrective sequence, and in consequence, W1 should identify as “:3”. In terms of the Elliott wave formations, W1 could be the first or the second segment of a corrective pattern, like a Flat pattern, a triangle formation, or the center of a Complex Correction.

A second option considers the possibility of a five-wave structure. If it occurs, W1 should label as “:5”, and the structure could correspond to the end of a zigzag pattern.

Condition b: occurs when W0 moves between 100% and 161.8% of W1. In this scenario, W1 should be part of a three-wave structure. It means that we should identify it as “:3”. In consequence, W1 could belong to the first segment of a Flat pattern, a section of a Triangle structure, or the center of a Complex correction.

Condition c: this condition occurs if W0 is between 161.8% and 261.8% of W1. In the same way that condition b, in this scenario, W1 should be part of a corrective formation as a flat (which should be an irregular flat), triangle, or complex correction.

Condition d: occurs when W0 is higher than 261.8% of W1. In this case, W1 likely will be the first part of a corrective structure; then, W1 should identify as “:3”. In terms of the Elliott wave formations, the structure in progress could correspond to a Flat pattern, a triangle, or the center of a complex correction.

## The Sixth Rule

This rule will activate if wave 2 retraces between 161.8% and 261.8% of W1. The possible conditions are similar as in the fifth rule and are detailed as follows.

Condition “a”: this condition occurs if W0 is lower than 100% of W1. In this scenario, W1 could be a three-wave structure (labeled as “:3”), and W1 could correspond to a flat, triangle, or the connector of a complex correction. A second scenario considers that W1 could be a five-wave formation (identified as “:5”), then, W1 could be the end of an impulsive movement.

Condition “b”: occurs when W0 moves between 100% and 161.8% of W1. In the same way that Rule 5, condition b, the most probable formation for W1 is a three-wave structure and should identify as “:3”. W1 could be the first segment of a flat, an internal section of a triangle, or the center of a complex correction.

Condition “c”: this condition occurs if W0 is between 161.8% and 261.8% of W1. The structure that W1 develops could correspond to a corrective pattern, which should identify as “:3”, and the formation developed could be a flat pattern with failure in C or an expansive triangle.

Condition “d”: occurs when W0 is higher than 261.8% of W1. In this case, W1 could be part of a zigzag, a segment of a contractive triangle, a flat pattern with a failure in C, or the correction of an impulsive move. In any case, W1 should identify as “:3”.

## The Seventh Rule

The wave analyst must use this rule when the retrace experienced by wave 2 is higher than 261.8% of wave 1. In this case, the possible conditions of W0 are similar to rules fifth and sixth, which are as follows.

Condition “a”: this condition occurs if W0 is lower than 100% of W1. In this case, W1 could be part of a three-wave structure (identified as “:3″) developing a complex correction, or a flat with a complex wave B. Another option for W1 could be a five-wave structure (labeled as”:5″) running in the failure of the fifth wave.

Condition “b”: occurs when W0 moves between 100% and 161.8% of W1. In this condition, W1 could be a three-wave structure (identified as “:3”) performing the center of a complex correction, a flat pattern, or a contractive triangle.

Condition “c”: this condition occurs if W0 is between 161.8% and 261.8% of W1. In this case, W1 could be part of a corrective formation as a continuous correction, a flat pattern, or a contractive triangle, and W1 should identify as “:3”.

Condition “d”: occurs when W0 is higher than 261.8% of W1. In this scenario, the structure suggests that W1 could be part of a corrective formation (tagged as “:3”) as a zigzag pattern, the connector of a double zigzag, the center of a complex correction (or wave-x), or a contractive triangle.

## Conclusions

In this educational article, we reviewed what should be the Elliott wave structure that W1 build when W2 exceeds 100% of W1. As can be observed, in most cases, the formation developed by W1 corresponds to a corrective sequence.

According to R.N. Elliott’s words, the knowledge of the corrective formations could provide to wave analyst an edge over what should be the next move. In this context, the comprehension of different rules and conditions presented could ease and offer a relevant clue in the wave analysis to the Elliott wave trader.

• Neely, G.; Mastering Elliott Wave: Presenting the Neely Method; Windsor Books; 2nd Edition (1990).
• Prechter, R.; The Major Works of R. N. Elliott; New Classics Library; 2nd Edition (1990).
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## How to Use Retracements to Analyze Waves – Part 4

In this educational article, we’ll review the fourth rule defined by Glenn Neely for the preliminary wave analysis. This rule, by its nature and context, it is likely that correspond to a corrective structure.

## The Fourth Rule

The fourth case described by Neely considers the context when the price action developed by W2 retraces between 61.8% and 100% of W1. In the same way that the wave analyst measures the retracement developed by W1 on W0, and W2 on W1, it is necessary to evaluate the retracement of W3 on W2.

The author of “Mastering Elliott Wave” identified three possible categories of movements for wave three (W3), which are as follows.

• Category “i”: will be considered if W3 is higher or equal to 100% and less than 161.8% of W3.
• Category “ii”: this category occurs if W3 moves between 161.8% and 261.8% of W2.
• Category “iii”: this category will occur if W3 is higher than 261.8% of W2.

The categories mentioned and their implications are detailed below.

Condition “a”: we consider this condition if W0 is lower than 38.2% of W1. For the three categories mentioned, in the most common cases, W1 could be the first segment or the center of a three-wave formation. In this context, W1 should identify as “:3”. In terms of the Elliott wave patterns, the structure could correspond to a Flat formation, the center of a triangle, or a segment of a complex corrective sequence.

In some particular cases, W1 may correspond to the end of a zigzag pattern inside of a complex correction or the end of a third wave. In this situation, W1 should identify as “:5”.

Condition “b”: will occurs if W0 is greater or equal than 38.2% and lower than 100% of W1. Depending on the extension of W3, W1 be likely the beginning or the mid-part of a corrective formation; then, W1 should identify as “:3”. In this context, W1 could be part of a flat pattern or the center of a Triangle formation.

In a particular case, W1 could be the end of a five-wave sequence; therefore, W1 must label as “:5”. If this scenario occurs, W1 could correspond to the end of a zigzag pattern.

Condition c: this condition occurs if W0 is greater or equal than 100%, and lower than 161.8% of W1. In this case, W1 belongs to a three-wave formation and should identify as “:3”. In terms of the structures defined by R.N. Elliott, the sequence in progress could correspond to a Flat pattern, a Triangle formation, or the center of a complex corrective formation, for example, a double or triple three pattern.

Condition d: this condition occurs if W0 is between 161.8% and 261.8% of W1. Similarly to condition “c,” in this case W1 should identify as “:3”. And in terms of the Elliott wave analysis, the structure in progress could be a flat, a triangle formation, or any part of a complex corrective sequence.

Condition e: will consider if W0 is higher than 261.8% of W1. In this condition occurs the same situation that conditions “c” and “d.” It means that W1 is part of a three-wave structure and should be tagged as “:3”.

According to the structures defined by the Elliott wave theory, W1 could be the first segment of a flat pattern, the center of a triangle formation, or the center of a complex corrective sequence.

## Conclusions

In this article, we have seen the possible formations that could develop according to the retracements experienced by waves W0 and W2 concerning W1, and W3 compared to W2.

In terms of the patterns defined by the Elliott wave theory, the most likely formations to which W1 might belong is to a flat pattern, a central segment of a triangle structure, or the center of a complex corrective sequence.

• Neely, G.; Mastering Elliott Wave: Presenting the Neely Method; Windsor Books; 2nd Edition (1990).
• Prechter, R.; The Major Works of R. N. Elliott; New Classics Library; 2nd edition (1990).
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## How to Use Retracements to Analyze Waves – Part 3

In this educational post, we will review the third rule on the use of retracements in the wave analysis devised by Glenn Neely.

## Third Rule

The third rule occurs when wave 2 (W2) retraces precisely 61.8% of wave 1 (W1). This scenario tends to be somewhat confusing to analyze because when the price retraces to 61.8%, there is the same likelihood that the structure in progress is an impulsive or corrective formation.

Once the retracement of W2 is compared with the height of W1, the wave analyst should evaluate the length of W0 relative to W1. From the resulting measure, several potential scenarios follow, each meeting one of the six following conditions.

Condition “a”: this condition occurs when W0 is lower than the 38.2% level of W1. In this case, W1 could be the end of a zigzag structure inside a complex corrective sequence. In this case, the end of W1 should be identified as “:5”. Another option is that W1 moves inside a continuous correction, or it is part of the first leg of a flat pattern, in this case, the end of W1 should be identified as “:3.

Condition “b”: this condition occurs if W0 is higher or equal than 38.2%, and lower than 61.8% of W1. Considering the lengths of waves “3” (W3) and “-1” (W-1), W1 could be the end of a zigzag pattern inside of a complex correction; in this case, W1 should be identified as “:5. There is another possible scenario when W1 is part of an ending pattern of an impulsive structure; for this setting, W1 should be tagged as “:3”.

Condition “c”: this condition arises when W0 is higher or equal than 61.8% and lower than 100% of W1. In this scenario, W1 could be part of a corrective structure, like a Flat or Triangle pattern. In consequence, W1 should be identified as “:3”. When the length of wave 3 (W3) is shorter than W1, W1 could be the end of a zigzag pattern, and W1 should be labeled as “:5”.

Condition “d”: this condition appears when W0 is higher or equal than 100% but lower than 161.8% of W1. Depending on the lengths of waves W2, W3, and W-1, W1 could be the first segment of a zigzag pattern. In this case, W1 will be identified as “:5”. In another instance, W1 could correspond to a section of a triangle structure or the central part of a flat pattern. If the wave analyst faces this scenario, it should identify to W1 as “:3”.

Condition “e”: This condition occurs when W0 is between 161.8% and 261.8% of W1. In the same way as with the “d” condition, W1 could correspond to the first segment of a zigzag pattern. Therefore, W1 will be identified as “:5”. The second possibility is that W1 could be the central section of a flat formation that concludes in a complex corrective pattern or a segment of a triangle formation. In this case, W1 will be tagged as “:3”.

Condition “f”: this condition occurs when W0 is higher than 261.8% of W1. In this case, it applies the same identification alternatives for W1 as a “:5” or “:3” described in the previous conditions. In other words, W1 could be part of a zigzag, flat, or triangle pattern.

## Conclusions

The third rule studied in this article, reveals that this case corresponds mainly to a corrective formation. On the other hand, during the preliminary wave analysis, it is relevant to study the context in which the price action advances.

In the same way, although there are three kinds of basic corrective structures, as the price advances, the wave analyst must discard the options that couldn’t correspond to the Elliott wave formation. As said by R.N. Elliott in his work ” The Wave Principle,” the knowledge of the corrective structures provides the student an edge to visualize the potential next move of the market.

• Neely, G.; Mastering Elliott Wave: Presenting the Neely Method; Windsor Books; 2nd Edition (1990).
• Prechter, R.; The Major Works of R. N. Elliott; New Classics Library; 2nd Edition (1990).
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## How to Use Retracements to Analyze Waves – Part 2

In our previous educational post, we presented the first rule defined by Gleen Neely to analyze waves. In this article, we will introduce the second rule.

## Second Rule

The second rule defined by Neely occurs when W2 is greater or equal than 38.2%, and lower than 61.8% of W1. Once the retracement realized by W2 is measured, the length of W0 will provide five possible conditions as follows.

Condition “a”: occurs when W0 is lower than 38.2% of W1. In this case, wave W1 should be identified as “:5”. This movement could correspond to an ending sequence of a corrective structure. Another possibility for this condition is that W1 belongs to the ending move of an impulsive sequence.

Condition “b”: this condition takes place when W0 is greater or equal to 38.2%, but lower than 61.8% of W1. In this case, it is likely that W1 corresponds to a five-wave sequence and completes a corrective formation and should be tagged as “:5”. However, it is also possible that according to a specific advance of waves W2 and W3, wave 1 is a three-wave structure and should be identified as “:3”.

Condition “c”: this condition occurs when W0 moves between 61.8% and 100% of W1. In this case, W1 could correspond to the end of a flat, or zigzag pattern, and in consequence, W1 should be identified as “:5. Depending on the context of the market under study, the structure could correspond to a complex corrective sequence. On the other hand, if W0 and W2 hold some specific lengths, W1 could be a three-wave structure, and W1 should be labeled as “:3”.

Condition “d”: this condition must be considered when W0 moves between 100% and 161.8% of W1. In this case, W1 could correspond to a zigzag formation, and in consequence, W1 should be labeled as “:5”. Another scenario may consider the possibility that the structure in progress would correspond to a triangle formation. In this case, W1 should be identified as “:3”.

Condition “e”: this considers the movement of W0 beyond of 161.8% of W1. When this situation occurs, wave 1 corresponds to a five-wave structure, and in consequence, W1 should be labeled as “:5”.

## Conclusions

As commented in the previous article, when the wave analysts study the market structure, each movement should not be analyzed individually, instead of this, wave analyst must study the market in a context from the previous moves, and the progress developed by market across time.

In the following educational article, we will unfold the third rule described by Glenn Neely.

• Neely, G.; Mastering Elliott Wave: Presenting the Neely Method; Windsor Books; 2nd Edition (1990).
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## How to Use Retracements to Analyze Waves – Part 1

In our previous educational post, we learned to identify the end of a movement. In this article, we will discuss how to use and evaluate retracements in the wave analysis.

## Defining Retracement Rules

Glenn Neely, in his work “Mastering Elliott Wave,” establishes a set of rules and conditions to evaluate the retracements that each wave makes.

The first step begins with the analysis of the first movement and comparison of the retracement made in the second move (W2) with the first one (W1). Once we evaluated the retracement of W2, we need to analyze the retracement developed on the previous wave (W0) with respect to the first move.

In summary, depending on the retracement of wave 2 (W2) with respect to wave 1 (W1) and the retrace of wave zero (W0) compared to W1. Neely defined a ser of rules and conditions to evaluate and identify each movement. The set of rules will be as follows.

## First Rule

We consider this rule when the second wave (W2) is lesser than 38.2% of the first wave (W1). Once we have measured the retracement made by W2, we must evaluate the previous wave (or wave W0). Under this rule, there are four possible conditions.

Condition “a”: occurs when the high of W0 is below the 61.8% level of W1. However, it is necessary to evaluate the retracement experienced by the previous wave to W0 (it is W-1). Depending on its length, W1 could be identified as “:3” or “:5”. It means that W1 could be part of a corrective or impulsive structure.

Condition “b”: this condition occurs when if  W0’s high is above 61.8% but below 100% of W1. Depending on the length of W-1, W1 could correspond to an impulsive or a corrective wave; thus, W1 could be identified as “.5” or “:3.

Condition “c”: this condition occurs when W0 is above or equal to 100%  of W1 level and less or equal than 161.8 of W1. In this case, we will label as “:5” the end of wave 1. However, under certain conditions, W1 could correspond to a “:3” structure.

Condition “d”: occurs when W0 is larger than 161.8% of W1. In this case, the end of W1 must be identified as “:5”. The labeling means that W1 corresponds to a five-wave sequence.

## Conclusions

The evaluation of the retracements experienced by W2 and W0 could deliver insights to the wave analyst of what kind of wave is W1. However, in some cases, it is necessary to evaluate the context of more waves. This study would provide the wave analyst an overview of the Elliott wave structure that the market develops. For example, if the structure in progress corresponds to a terminal movement of a corrective sequence or an impulsive wave in development.

In the following article, we will continue discovering the rules described by Gleen Neely for the wave analysis.

– Neely, G.; Mastering Elliott Wave: Presenting the Neely Method; Windsor Books; 2nd Edition (1990).
– Prechter, R.; The Major Works of R. N. Elliott; New Classics Library; 2nd edition (1990).

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## Fibonacci Confluence Zones

### Fibonacci Confluence Zones

First, I want to know if this retracement is appropriate given how much time has passed – we’re 23 years from the March 1997 high and 19 years from the March 2001 low. Do these Fibonacci retracement levels still work? Do they remain valid? The black vertical line is the start of the retracement, so anything before the retracement is not used, it’s the data afterward that matters. Let’s look.

Are these Fibonacci retracement levels we drew still relevant? I would say so. A quick look at A, B, C, and D prove it. Especially for the most recent data at D on the AUDUSD weekly chart – seven-year lows bounce off of the 61.8% Fibonacci retracement level from 20+ years ago! But let’s look at some more Fibonacci retracements made off of other significant swings. Fair warning: there’s going to be several images here.

The Fibonacci retracement above is from the swing high in July 2018 to the confirmation swing low in October 2001. Like the previous Fibonacci image, we can see that prices have respected the retracement levels even a decade after the retracements were established. But we’re not done.

The above image is the first retracement we looked in this article (the same swing low in March 2001) using the same swing low; we draw more retracements to the next confirmation swing lower highs. I’ve drawn two additional Fibonacci retracements in Red and Orange. Notice how some of the Fibonacci retracements occur within proximity of one another. Letter A is shared retracement zones of the 50% and 61.8% of two different retracements. B has a confluence zone of three Fibonacci retracement levels, 50%, 61.8%, and 38.2%. And C has two overlapping retracements of 50% and 38.2%. Now let’s get to the fun part.

The previous image showed three Fibonacci retracement confluence zones at A, B, and C. Those confluence zones were just three of many that will appear on any chart on any time frame. What happens if we draw a series of retracements using major swings as the start point of the Fibonacci retracements and then retrace to the next confirmation swing highs and lows? We’ll get a chart that looks like the one below.

I’ve added some other letters to identify more confluence zones. I admit the chart does look like a mess. And it should. Not every Fibonacci retracement to a new confirmation swing high or low will coincide with shared Fibonacci levels, but they frequently do. Once we’ve drawn out a series of retracements, we should see a set of these confluence zones. Now begins the cleanup phase. We’re going to place horizontal lines where there are confluence zones of Fibonacci retracement levels.

The letters A, B, C, D, and E show where the Fibonacci confluence zones have formed, and are represented by horizontal lines (black) on the chart. Now, you can either delete or hide all of the Fibonacci retracements so that we are left with only the horizontal lines at A, B, C, D, and E.

I know that the horizontal line at D represented the most confluence zones on the AUDUSD weekly chart, but it also represented some of the longest-lasting and respected Fibonacci retracement levels. Starting at the horizontal level at D, I draw a box from D down to the major low on the AUDUSD chart. Now, the width of this box doesn’t matter – just the range.

After I’ve established that box from D down to the major low, I can remove the horizontal lines. Then I start to copy the box all the way to the top of the range. All I’m doing here is copying and pasting the box so they ‘stack.’

Now comes the cool part. I’m going to treat each box like its own range and place Fibonacci retracements inside each box, moving from bottom to top.

No matter how many times I’ve done this, it still blows my mind. But there is probably a lingering question. You’re probably looking at the chart and saying, ok, cool, but there are some massive gaps between these Fibonacci levels. You are correct if you are thinking about this. Now, Connie Brown never wrote about this next part; it’s something I discovered and developed on my own. The approach comes from the idea that markets are fractalized and proportional, so we should be able to break down like zones into smaller ranges. This is especially important and useful for traders who prefer to trade on faster time frames like four-hour or one-hour charts. Using price action that is more recent and relevant, I can draw a Fibonacci retracement from the 50% level at 0.71688 to the start/end of the box at 0.6368.

Letters a and b on the chart above identify the 50% Fibonacci level and start/end level described in the prior paragraph. The black horizontal lines represent the Fibonacci retracement drawn from a to b. I’ve also switched the chart from a weekly chart to a daily chart. When we see that daily chart, we get a real idea of how powerful the Brown Method of Fibonacci analysis is and how precise the study of these confluence zones can be.

In summary, to utilize the Brown Method, the followings steps are as follows:

1. Create Fibonacci retracements by using a major swing high/low and drawing to the confirmation swing with a strong bar – not the next extreme high/low.
2. After identifying Fibonacci confluence zones, place horizontal lines on the major price levels where multiple Fibonacci levels share the same price range.
3. Delete or hide the Fibonacci levels so that only the horizontal lines are present – make sure you identify which horizontal line had the most powerful collection of Fibonacci levels.
4. After identifying which horizontal line was the most potent and relevant, determine if it is closer to the all-time high or all-time low. Draw a box or a price range from that horizontal line to the all-time high or low – whichever is closest.
5. Repeat the boxes by copying the same box and ‘stack’ it to the all-time high/low – the opposite of whichever was used to establish the box/price range.
6. Draw Fibonacci retracements in the boxes.

Sources:

Brown, C. (2010). Fibonacci Analysis: Fibonacci Analysis. Hoboken: Wiley.

Brown, C. (2019). The Thirty-Second Jewell: Thirty Years Behind Market Charts From Price To W.D. Gann Time Cycles. Tyton, NC: Aerodynamic Investments Inc.

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## You’re still using Fibonacci Retracements Incorrectly

### You’re still using Fibonacci retracements incorrectly

Like any discipline or field of study, Technical Analysis goes through changes. Old theories and approaches are rigorously utilized and tested, new ideas are studied, and advancements in the field occur. And, like any discipline or study, it takes a while for people to adapt to the new way of doing things. There is a shocking amount of updated theory and application in Technical Analysis that has yet to make its way down to the retail trader and investor – some of it is almost 25+ years old! One of the updates to old application and practice is how we use a tool known as a Fibonacci retracement. For many years, the method has been to draw a retracement from one extreme swing to the next (from swing high to swing low or swing low to swing high). In practice, there are a few incidents where this may work out just fine, but the new and better way shows how much more accurate and useful the update has been.

### Old vs. New

I want to start off right away by showing you the difference between the old and new methods – I reference the new approach as the Brown Method. The AUDUSD Weekly chart below shows the old way of drawing Fibonacci retracements. With the old process, the Fibonacci retracement is drawn from the extreme swing high on the week of August 5th, 2011, to the extreme swing low on the week of October 31st, 2008. The vertical line delineates the starting point of the retracement, and no data to the left of that vertical line should be used to determine the efficacy of the retracement. It is only the data after the vertical line that is important and relevant.

Now, contrast the image above with the new Brown method below.

You will observe how much more accurate the Fibonacci retracement levels are on the Brown Method vs. the old method. What changed? Observe the swing low retracement on both charts – they are different. They both start at the same level, but the retracement end for the Brown method is drawn to the swing low on the week of February 6th, 2009. But why? Why do you draw to a seemingly random or ‘off’ swing and not the extreme? The reason for this is based on the writings of W.D. Gann.

### The Brown Method

I call this new Fibonacci retracement method, the Brown Method, after Connie Brown. It is Connie Brown who discovered this new theory and wrote about it in her 2008 book, Fibonacci Analysis. It is not a very large book, under 200 pages, but it is one of the single most important works in Technical Analysis of the past 15-years. Her discoveries of how confluence zones of Fibonacci retracements dictate the normal rhythm and pulse of the market are truly groundbreaking. But to the first question of why I did not draw the retracement to the extreme low? Connie Brown points out that W.D. Gann made the point that the end of a trend is not established by the extreme high or low – it is the secondary high/low that confirms the change in trend (sometimes known as the confirmation swing). This makes sense because the extreme is very rarely the level where the participants in a market agree that a trend is finished.

So how do we identify what swing to use? How did I identify what candlestick was the confirmation swing low on the weekly AUDUSD chart? Again, this goes back to Brown – but this information is from her penultimate work (her magnum opus in my opinion), The 32nd Jewel. The first chapter of her massive book (it weighs about eight lbs., is three inches thick and nearly 1100 pages long) addresses some of the problems students of hers have had with the application of her updated Fibonacci retracement method. To identify the correct swing to use, we look for the strongest bar. Let’s take a ‘zoomed’ in look at the swing low used on the AUDUSD weekly chart above.

It will take you some practice to find the swing bar (also, gaps are used, but that is for another article) that would be considered the ‘strong bar.’ What constitutes a strong bar? That can be somewhat subjective, but look at the candlestick that I’ve identified as the strong bar compared to the candlesticks before it and around it. Why did I pick this candlestick? First, it is a bullish engulfing candlestick on the weekly chart. Second, that candlestick rejected any further downside pressure after a consecutive four week period of weekly candlestick closes below the open. Third, the open and low of the candlestick created the support zone for the next five weeks. In a nutshell, the candlestick is massive, its sentiment overwhelmingly one-directional, and the lows of that candlestick were respected. That candlestick was the confirmation swing low because it confirmed the end to lower prices and was the most substantial candlestick before the new uptrend occurred.

Side note: Connie Brown also said to look for gaps in the price action as areas to draw the confirmation swing. Finding gaps is a much easier process when looking at traditional markets like the stock market. Forex data can vary from broker to broker as some data providers show gaps, and others do not.

The following articles will go into further detail on how to implement more of the Brown Method. I believe that what you will read and learn will be one of the ‘wow’ moments you experience in the study of Technical Analysis. To say that what Connie Brown has discovered is truly amazing is an understatement when we learn about the confluence of Fibonacci zones and how they create the natural price zones that an instrument swings to, it is a truly eye-opening experience.

Sources:

Brown, C. (2010). Fibonacci Analysis: Fibonacci Analysis. Hoboken: Wiley.

Brown, C. (2019). The Thirty-Second Jewell: Thirty Years Behind Market Charts From Price To W.D. Gann Time Cycles. Tyton, NC: Aerodynamic Investments Inc.

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## Perfecting The Fibonacci Retracements Trading Strategy

### Introduction

The Fibonacci tool was developed by Leonardo Pisano, who was born in 1175 AD in Italy. Pisano was one of the greatest mathematicians of the middle ages. He brought the current decimal system to the western world ( learned from Arab merchants on his trips to African lands). Before that, mathematicians were struggling with the awkward roman numerical system. That advancement was the basis for modern mathematics and calculus.

He also developed a series of numbers using which he created Fibonacci ratios describing the proportions. Traders have been using these ratios for many years, and market participants are still using it in their daily trading activities.

In today’s article, we will be sharing a simple Fibonacci Retracement Trading Strategy that uses Fibonacci extensions along with trend lines to find accurate trades. There are multiple ways of using the Fibonacci tool, but one of the best ways to trade with Fibonacci is by using trend lines.

With this Fibonacci trading strategy, a trader will find everything they need to know about the Fibonacci retracement tool. This tool can also be combined with other technical indicators to give confirmation signals for entries and exits. It also finds its use in different trading strategies.

Below is a picture of the different ratios that Leonardo created. We will get into details of these lines as we start explaining the strategy.

### Strategy Prerequisites

Most of the charting software usually comes with these ratios, but a trader needs to know how to plot them on the chart. Many traders use this tool irrespective of the trading strategy, as they feel it is a powerful tool. The first thing we need to know is where to apply these fibs. They are placed on the swing high/swing low.

• A swing high is a point where there are at least two lower highs to its right
• A swing low is a point where there are at least two higher lows to its right

If you are uncertain of what the above definitions meant, have a look at the below chart.

Here’s how it would look after plotting Fibonacci retracement on the chart.

In an uptrend, it is drawn by dragging the Fibonacci level from the swing high all the way to swing low. In case of a downtrend, start with the swing high and drag the cursor down to the swing low. Let’s go ahead and find out how this strategy works.

### The Strategy

This strategy can be used in any market, like stocks, options, futures, and of course, Forex as well. It works on all the time frames, as well. Since the Fibonacci tool is trend-following, we will be taking advantage of the retracements in the trend and profit from it. Traders look at Fibonacci levels as areas of support and resistance, which is why these levels could be a difference-maker to a trader’s success.

Below are the detailed steps involved in trading with this strategy

##### Step 1 – Find the long term (4H or daily time frame) trend of a currency pair

This is a very simple step but crucial, as well. Because we need to make sure if the market is either in an uptrend or a downtrend. For explanation purposes, we will be examining an uptrend. We will be looking for a retracement in the trend and take an entry based on our rules.

##### Step 2 – Draw a line connecting the higher lows. This line becomes our trendline.

The trend line acts as support and resistance levels for us. In this example, we will be using it as support.

##### Step 3 – Draw the Fibonacci from Swing low to Swing high

Use the Fibonacci retracement tool of your trading software and place it on swing low. Extend this line up to the swing high. Since it is an uptrend, we started with a 100% level at the swing low and ended with 0% at the swing high.

##### Step 4 – Wait for the price to hit the trend line between 38.2% and 61.8% Fibonacci levels.

In the below-given figure, we can see that the price is touching the trend line at two points (1 and 2). There is a significant difference between the two points. At point 1, the price touches the trend line between 78.6% and 100%, whereas, at point 2, the price touches the trend line between 38.2% and 61.8%.

The region between 38.2% and 61.8% is known as the Fibonacci Golden Ratio, which is critical to us. A trader should be buying only when the price retraces to the golden ratio, retracements to other levels should not be considered. Therefore, point 2 is where we will be looking for buying opportunities.

##### Step 5 – Entry and Stop-loss

Enter the market after price closes either above the 38.2% or 50% level. We need to wait until this happens, as the price may not move back up. However, it should not take long as the trend should continue upwards after hitting the support line.

For placing the stop loss, look at previous support or resistance from where the price broke out and put it below that. In this example, stop loss can be placed 50% and 61.8% Fibonacci level because if it breaks the 50% level, the uptrend would have become invalidated. The trade would look something like this.

### Final words

The Fibonacci retracement tool is a prevalent tool used by many technical traders. It determines the support and resistance levels using a simple mathematical formula. Do not always rely only on Fibonacci ratios, as no indicator works perfectly alone. Use additional tools like technical analysis or other credible indicators to confirm the authenticity and accuracy of the generated trading signals. One more important point that shouldn’t be forgotten is not to use Fibonacci on very short-term charts as the market is volatile. Applying Fibonacci on longer time frames yield better results.

We hope you find this strategy informative. Try this strategy in daily trading activities and let us know if they helped you to trade better. Cheers!