Following on from the Fibonacci basics article we can now start to use a structured approach to identify and trade with Fib levels.

Trading Fib levels is pretty much the same as trading a pullback but you are using fib levels to determine where and when you you will get into a trade and place your stop loss level as well as identify your target levels.

For short you are looking for(reverse rules for longs;

• A thrust move so that you can then calculate your Fib retracement levels.
• A move up to at least the 50% (or 61%) Fib retracement
• A bar to close below the 38% (or 50%) Fib retracement level.  This bar is your trigger bar for the entry.
• Stop loss goes past the event. This is the highest point that prices retraced to.
• The first target is the low of the thrust move, second target is a measured move.

In the charts above you can see the application of the strategy in real time.

Identify a thrust move (between the first red and blue arrow). Your charting software will usually calculate the Fib retracement levels for you.

In this example, you can see a move up to the 61% Fib retracement level and shortly after a bar closed below the 50% Fib Retracement level.  This is the trigger bar for the entry. The stop loss goes past the event that caused the trade.  This is above the highest point that price retraced to before creating the trigger bar (the second red arrow). 

The targets are the low of the previous move down (first blue arrow) I usually place my target just above this support zone. The second target is a 100% measured move using the fib extension tool.  The height of the pattern (the distance between the first red and blue arrow) added to the start of the next move down (the second red arrow). 

That's it, simple!

Intraday considerations.

• We can use this pattern as an entry method into capturing the average days move.  In this instance the second target would be based on the ATR as opposed to a measured move. More often than not these will often line up with each other.
• IF the Average Days Move has already been achieved for the day then the target is simply a retest of the current days high or low.  As the "expectation" for the day has been achieved already the likelihood of price moving further us unlikely. This doesn't mean to say that it cant happen its just that the probability of it happening is small due to the lack of potential or reduced potential for a moved based on the ATR for that currency pair.

Video Resources

• Trading with Fibs - Part 1
• Trading with Fibs - Part 2
• Fibonacci Presentation on FX Street