FIBONACCI RETRACEMENT EXPLAINED
With so many indicators out there, it’s easy to get confused if you’re trying to pick the best one. Well, the truth is there is no correct answer to this question. It all depends on what your trading style is. However, one tool is always available for you to use in whichever style you work with and that is the Fibonacci Retracement.
So what is the Fibonacci Retracement?
Fibonacci retracements identify key levels of support and resistance. Fibonacci levels are commonly calculated after a market has made a large move either up or down and seems to have flattened out at a certain price level.Investopedia
How to insert Fibonacci in MT5
Adding a Fibonacci retracement to your MT5 chart is one of the easiest things to do. It is so popular that MT5 has a special button for it directly on its tools bar.
Simply, click on the button shown in the above image, go to your graph and select two points. When selecting your two points, always make sure you are going from left to right in the progression of time, as going from right to left would give a false indication.
Furthermore, always make sure that those two points are a high and a low, because selecting a current price would lead to the retracement levels being null and void.
Should you wish to customize your Fibonacci drawing, all you have to do is double click on the Fibonacci drawing you just created, right click, and select 'Properties of Fibo'and then'Common'.
Within the Common Tab, you’d find simple things to adjust, those include Name, which is basically naming the line. The default name is the timeframe where the drawing was made, followed by Fibo followed by a number.
Description is basically describing this object or line. The default settings leave this section empty, but if you wish to fill it out you can.
Style is for those of you who are creative in nature and who like to have things in certain colors and certain styles of line. The tick box of Draw object as background refers to having the line in front of the graph or behind it, ticking it would send the line to the back and unticking it to the front.
The Disable Selection tick box prevents you from selecting the Fibonacci drawing again, so be careful with this box as you might get stuck with a Fibonacci drawing.
Fibonacci relies on certain levels. These levels are 23.6%, 38.2%, 50.0%, 61.8%, 161.8%, 261.8%, 423.6% and they are very important when viewing the Fibonacci. They can all be adjusted within the Levels Tab in the Properties section of the Fibonacci Retracement.
However, it is imperative that these levels stay the same, else you might get a false reading. Unless you know what you are doing when it comes to these levels, it is best to leave them alone.
Adding and Deleting levels is easy through the Add and Delete buttons, not rocket science here guys. Should you wish to restore everything back to their original state, pressing the Default button would do the trick.
The Parameters Tab of the Fibo properties is all about which levels are included in the calculator of the levels and where they fall. These are based on the start and end points when drawing your Fibonacci line.
There are also 2 tick boxes beneath the Dates, Ray Right and Ray Left. What those represent is the ability to elongate the Fibonacci Level lines to either the Left, by ticking the Ray Left tick box, or to the Right, by ticking the Ray Right tick box.
This tab allows you to choose where you want your indicator to appear, at which time frames. As you can see in the screenshot to the right, All timeframes is selected, which means that you get to see the indicator in all timeframes.
You also have the option to pick individual timeframes for your indicator. It’s all about customizing in a way to help you trade better.
Each trader's strategy will be different, so as an investor you need to consider how each of the strategies below might fit into your overall angle on the market. Not every trader uses the options below, and it is alright if none of them align with your strategy. Strategies that utilize Fibonacci retracements include:
- You can enter into a trade near the 38.2% retracement level with a stop-loss or take-profit order placed a little below the 50% level.
- You can enter into a trade near the 50% level with a stop-loss or take-profit order placed a little below the 61.8% level.
- When entering a sell position near the top of the large move, you can use the Fibonacci retracement levels as profit-taking targets.
- If the market retraces close to one of the Fibonacci levels and then resumes its prior move, you can use the higher Fibonacci levels of 161.8% and 261.8% to identify possible future support and resistance levels if the market moves beyond the high/low that was reached prior to the retracement.
Let’s take an example to see how the Fibonacci retracement levels can help you understand which levels are important and which are to be ignored.
With the Fibonacci drawn on BTCUSD between the Low of July 24th and the High of July 29th, we are able to pinpoint certain levels from which we can be certain some kind of movement will happen, whether a breakout or a reversal.
In the above example, we see how Bitcoin has risen sharply reaching a certain resistance and has reversed a bit, but what are the levels that can be considered important when trading this instrument. Well, that’s where Fibonacci Levels come in handy.
Now the price of Bitcoin is trading near the 23.6%, and the downward momentum that brought it to that level from the highs seems to be decreasing, this gives the impression that the 23.6% could be acting as an important support for the digital asset, implying that a move higher from that level is not entirely out of the question.
In this second example, we see how after the USDCAD bounced off the low it recorded, and headed higher only to find breaking through important resistances at the 23.6%, 38.2%, and 50.0%. It now targets the 61.8%, meaning that the USDCAD has retraced almost 61.8% of the drop that the pair has experienced between July 22nd, 2020 and July 28th, 2020.
That’s the basics. Trying it out for yourself is the best way for you to understand it more thoroughly. So go ahead, and see how Fibonacci fits in your trading style.
In our next article we take you through the6 steps of trading, from identifying opportunities, right through to closing your trade.