|Education - STEP 3|
The Fibonacci strategy uses different fib levels as the support and resistance levels of any currency and you can use these levels to open a new position or close an existing one. The movement of currency pair is same as the movement of waves that is moving to and fro. It is possible for any currency to move to some point and retrace back. Moving to some point is extension and retracing back is retracement. This is the reason why Fibonacci sequence is made up of extension and retracement. The lowest and highest levels of a Fibonacci sequence are 0% and 100% and 38.2%, 50% and 61.8% are the most important retracement levels in a Fibonacci sequence. These are support and resistance levels.
The measure is noted from low to high swing to get possible support and the measure is noted from high to a low swing to get possible resistance. To correctly mark the support and resistance levels, measure the length of swing and allow the Forex Trading program to divide it in the ratios of figures such as .382, .50 and .618. Possible support level or resistance level is seen when the market moves to these ratios.
How to construct Fibonacci retracement
To draw Fibonacci retracements, draw a trend line between the two extreme points such as a trough and a peak. The retracement tool present in your metatrader software then automatically inserts three horizontal lines. These lines intersect the trend line in the chart at the Fibonacci ratios of 38.2%, 50% and 61.8%. After an expressive movement of price either upside or downside, prices will frequently retrace an important portion of the original movement. With the retracing of price, support level and resistance level will also occur at or close to the Fibonacci retracement levels.
How to construct fibonacci retracement in uptrend
Now lets take an example of GBP/USD chart. As we can see in the figure below that swing low is 1.5365, so click on the swing low and drag it to the swing high that is observed at 1.5597. The fibonacci tool will automatically plot the levels for you. The retracement levels produced are 1.5551 (23.6), 1.5526 (38.2), 1.5504 (50.0) and 1.5458 (61.8). Now it is expected that if the market pulls back and price retraces from its high then it will find its support at any one of these fibonacci levels produced. Forex traders and the investors will use these fibonacci levels to place their buy orders.
How to construct Fibonacci retracement in downtrend
Now lets take an example of GBP/USD chart to show fibonacci retracement in downtrend. As we can see in the figure below that swing high is 1.6000, so click on the swing high and drag it to the swing low that is observed at 1.5594. The fibonacci tool will automatically plot the levels for you. The retracement levels produced are 1.5864 (61.8), 1.5796 (50.0), 1.5728 (38.2) and 1.5662 (23.6). It is expected in the downtrend that if market moves forward and price starts retracing from low then resistance will be observed at any of these fibonacci levels. Forex traders and the investors can use these fibonacci levels to place their sell orders and earn money.
How to draw Fibonacci Retracement
New Forex traders can also draw Fibonacci Retracement themselves and the steps are easy to understand and simple to operate. So to draw Fibonacci Retracement yourself, follow the steps told below.
Open Metatrader Software
Open chart of any currency pair
Click on Insert menu, then click Fibonacci and click Retracement.
Insert Menu à Fibonacci à Retracement
Look at the picture below.
Your Fibonacci tool is selected. Now if you want to create Fibonacci Retracement for uptrend, click on swing low and drag your cursor to the swing high and the software automatically plots the levels for you. If you want to create Fibonacci Retracement for downtrend, click on swing high and drag your cursor to the swing low and the software automatically plots the levels for you.
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