Powerful Fibonacci Retracements Strategy Using AutoFibo MT4 Indicator

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Powerful Fibonacci Retracements Strategy Using AutoFibo MT4 Indicator

The Fibonacci Sequence is a mathematical sequence discovered by an Italian mathematician, Filius Bonacci, better known as Leonardo Fibonacci. This mathematical sequence however results to patterns and fractals that are found in pretty much almost everything. It is found in nature, the shape of the leaves, the spiral swirl of a shell, the petals of a rose, the length of the human arm, and even in the fractals of a snow.

So, you may wonder, how would this naturally occurring phenomenon help me in my forex trading? Evidently, Fibonacci Retracements and Extensions do occur in trading. Why? Maybe it has been engrained in our psychology after years and years of being naturally exposed to its patterns. It might have been engrained deeply enough that it also affects the way we think when we deal with money and trading. No one really knows.

Whatever the reason is, fact is that the discovery of Fibonacci patterns in trading has caused many traders to use Fibonacci as a tool, even as a strategy, for making decisions in trading. As traders, we make money by guessing how the crowd would think, even before they know they are thinking about it. If many are using Fibonacci, then chances are many in the crowd are making the same decisions at the same time. Then we can make money out of it.

We also are providing the AutoFibo strategy setup for you below. You can get your download link at the end of the blog post.

Fibonacci Retracements as Entry Levels

To make money in trading, we should know when to enter the market. Could Fibonacci Retracements be used for this? Indeed! And we will show you how.

After prices go in one direction for a prolonged period, it tends to go back. If it was going up, then it should come down. If it was going down, then it also comes back up. This is because those who have bought or sold the currency prior to the move should also be selling or buying it, if they think that the price is already right, in order for them to make money. Or in more technical terms, make their positions square. This occurrence in the market is also known as retracements. And Fibonacci also has it.

The Fibonacci Retracement numbers are 23.6, 38.2, 50.0, 61.8. These numbers are very crucial entry levels which many retail traders look at. The idea is to get in the market when the price retraces back to these levels. If we get to enter when the price retraces to these levels, we are in for a ride when it starts to go our way.

Let me show you an example of how Fibonacci Retracements work at 38.2 level on the USD/JPY pair on the H4 chart.

After rallying from a low of 111.692 to a high of 114.749, the USD/JPY pair retraced back to 113.560, which is almost the same as where the 38.2 fib retracement level was. If you went in the market at that level, you would have been one happy camper since price shot up to a high of 115.505.

Let me show you another example on the 61.8 retracement area for the EUR/USD on the H4 chart.

Again, price respected the Fibonacci level of 61.8. This is very common because 61.8 is the Golden Fibonacci level, which price usually respects more often than not. After price rallied from 1.0525 to 1.0714, price retraced back to the 61.8 fib area before shooting back up to 1.0782.

Fibonacci Stop-Loss Levels

Now that we know how to use Fibonacci Retracements to enter the market, the next question is where do we put our Stop-Loss levels? It is still found in the Fibonacci levels itself. This time we will be hiding our Stop-Loss just behind the next Fibonacci level. What we mean by this is that if we have entered at a price on a certain Fib level, then we will be putting our Stop-Loss just after the next Fib level. If you entered at 38.2, then your Stop-Loss should be after 50.0. If you entered at 50.0, then your stop loss should be after 61.8.

Let me show you where we should have put our Stop-Loss on our first example, USD/JPY on the H4.

If we were speculating that the price would turn at 38.2, then it is only logical that we put our Stop-Loss just below 50.0, since we don’t believe that it would go below that. This way we could still have a positive Risk-Reward Ratio.

What about the if we entered the market at 68.2 fib level? Where will we put our Stop-Loss? There is another level that is not commonly included in the Fibonacci Ratios, which we may use, 78.6.

Let’s use our previous example again to point that out.

Again, since we speculated that price would turn at 61.8, then it is only fitting that we place our Stop-Loss after the next Fibonacci level, 78.6.

Exit Levels

Now that we know how to enter the market and put stop-losses, the next thing we should know is where to exit the market. Remember, we can’t make money until we exit the market.

So how do we do this? I do not advocate using Fibonacci levels as targets, since this might be contradicting other strategies, such as Supply and Demand, which might also mean we would be pushing our luck against what other traders might be thinking. Usually, I would put my target levels just before the High of the rally.

Why are we putting our Take Profit just below the high of the previous rally? The logic is this, most of those who were able to enter the market on the previous rally still remember that prices dropped from that level. Specially those who lost money. This psychological effect makes that group of the market think that prices could once again drop from that level. It is better not to be too greedy in trading, rather than lose your shirt in the process.

But you may be looking at that chart and might be saying we could have squeezed a little bit more out of the market. Well, there is a way we could still do that. Partial Take Profits. We could exit only a part of our positions at that level, trail our Stop Loss, and have a higher target for the remaining position. Some advocate using Fibonacci Extensions for the targets, at level 1.00, 1.382 and 1.618, coming from where the price shot back-up after retracement. However, this might be pushing our luck. What we could do however, for the remaining position is to trail our Stop-Loss a certain distance away from the current price at a positive level, meaning even if you get stopped out, you are still in profit and it might be even more than your initial Take Profit.

Conclusion

Fibonacci Retracement is a powerful tool in our trading arsenal. Many even use it as a stand-alone strategy, which it could be. Many highly successful traders use it and it works for them. But combine this with other strategies, and it becomes more powerful. Use it wisely and you could be growing your account steadily.

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