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Guide to Using Fibonacci Levels for Forex Trading

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There has been a greater interest in forex trading during the past year, when compared to previous years, significantly driven by a large influx of new retail traders. On top of that, the market volatility has increased and for the first time in a few years, the currency market is more active.

As always, the emphasis is on the US Dollar which has been gaining, tracking the rise in Treasury yields. However, the trend has been uneven, leading to trading opportunities for both buyers and sellers. What’s even more important is that Dollar-denominated pairs are very liquid and create a proper environment for using technical analysis methods such as Fibonacci levels.

In this material, retail traders can find out two effective ways to use Fib retracement as well as multiple hints on how to increase their accuracy.

What Are Fibonacci Retracement Levels?

For those who don’t already know, Fibonacci retracement levels are horizontal lines that can indicate where support/resistance could likely occur. These levels stem from the Fibonacci sequence, a mathematical formula that originated in the 13th century.

The main Fibonacci retracement levels are 23.6%, 38.2%, and 61.8%, even though some traders sometimes even use the 78.6% or 50% levels, which is not a Fibonacci ratio. Markets don’t move up or down in a straight line, which makes the case for developing methods and techniques to get involved in the dominant trend, while also taking advantage of more attractive valuations generated by corrective moves.

Fib Levels for With-Trend Trading

In forex, Fib retracement levels are very often used for with-trend trading and to illustrate that, the next example on EURUSD would be conclusive. The Euro dropped until October 12th, breaking below multiple support levels, but as the risk sentiment improved, the Euro was among the gainers.

Chart, histogramDescription automatically generated

Based on the chart above, we can see the price rising, only to encounter resistance around 1.1620. Following that, sellers regained short-term control, which led the price lower towards 1.1575, where the 50% Fib retracement level was located. After that, buyers resumed impulsively and managed to break above 1.1620.

Fib Levels for Range Trading

The above example shows how to use Fib levels when there is clear directional bias. However, markets can be undecided sometimes, which makes the case for range trading. A second chart is related to GBPUSD, a pair that has been rising as the BOE is hinting at higher rates.

ChartDescription automatically generated

From a technical analysis point of view, if we plot the Fib levels for the bullish move between September 25th, 2020 and February 23rd, 2021, we can easily notice a highlighted area during which the price was range-bound between the 23.6% and 38.2% Fib levels. Given it is a daily chart, FX traders could find intra-day opportunities by also using smaller time frames.

Summary

Both examples show that Fib retracement levels can be used in different market conditions when there is a clear trend in play and also if the order flow is balanced and neither buyers nor sellers are in control. The efficiency of these techniques can be improved if traders add up oscillators and other support/resistance levels.



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