Educational guide on using Fibonacci method. Free Forex Fibonacci tutorial
Frequently Asked Questions about Fibonacci trading:
Let's answer some frequently asked questions:
How accurate is Fibonacci study, does it always work?
Don't be surprised to hear that when used alone, Fibonacci study will be somewhere around 50% accurate. Yes, that's right. If you use only Fibonacci to predict market direction and set your entry, you could be very soon disappointed with overall Fibonacci performance. However, when used in combination with other technical indicators or studies — Fibonacci becomes up to 96% accurate! That's the probability we want you to trade!
How do traders find what the price "has in mind"? They use additional technical indicators and studies, such as, for example, moving averages, trend lines, Pivot points, chart patterns analysis etc.
To help you begin your research of useful confirmation tools try setting up RSI (14) on a daily chart. Even if you trade 1 hour chart, RSI should be daily. Watch, if indicator shows below 50, then you can follow Fibonacci signals on 1 hour chart to go short, if above — only long. It won't be an absolute solution to all situations, but can bring Fibonacci effectiveness to a new more successful level.
What is the best time frame to use Fibonacci on?The beauty of Fibonacci method is that you can use it on any time frame. It will work precisely on daily charts, hourly charts and on smaller ones, even 5 and 1 minute! However, the larger the time frame the more accurate results traders can expect.
Traders should always keep an eye on daily Fibonacci — Set and Forget mode.
After calculating risk/reward ratio some entries, stops and profit targets according to Fibonacci rules can be a concerning factor. How to manage this situation?
There are a couple of things traders can do to ensure their risks and rewards are within the money management rules:
1. Entering only on 0.618 retracement — the safest, minimum risk level.
2. Setting a stop loss slightly below (for uptrend) / above (for downtrend) 0.618 retracement — which means that if the price has violated this level and moved further — there will probably be no Fibonacci setup and it is time to exit.
Here traders could choose: exiting with smaller loss and possibly later watching the price reversing and going in their favor, or waiting to collect bigger loss as the price reaches point A of AB swing, but hopefully there will be reverse before this happen...
3. Taking profits slightly before the price comes close to B point (after the retracement) — it will be a 100% level point if to calculate Fibonacci levels. It is the safest "play" — collecting profits before B point. Then, if traders decide to continue trading, they can place another entry when the price manages to pass through that 100% line (pass point B of AB swing). In such way traders could avoid the dangerous zone at B swing where the price, if it is going to be a change in the trend, will reverse and form double-bottom pattern and move against them.
4. Running two orders. Traders may try opening two orders at 0.618 retracement level. Close the first order at the 100% mark (B point), the second — let it run to 0.618 extension and bring a stop loss higher with each progress made. This way traders will collect some sure gains with the first order and if the price continues moving in their favor — they have a potential to benefit even more. However, with such approach traders are also doubling their risks and will colect additional loss if the price moves against them. In such cases when running 2 orders we would suggest exiting at least with one order at the violation of 0.618 retracement and if tolerated wait for price passing A swing to close the second order.
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