If you have read my previous post showing you how to plot the forex Fibonacci indicator on your chart, you will understand the power of the 0.382, 0.500 and the 0.618 Fibonacci retracement level. These retracement levels are areas where you will the price being repelled by them. What makes Fibonacci trading such a popular system is because of its ability to predict the subsequent movement of the price which is through its extension.
Here is how the extension works:
1) When you see the price retracing to the 0.618 level and then being repelled by it, there is a high chance that the price will extend itself to the 1.618 level.
2) When you see the price retracing itself to the 0.500 level and then being repelled by it, there is a high probability that you will see the price extends to the 1.500 level or even 1.618.
3) If you see the price retracing itself to the 0.382 level and then repelled by it, you will most probably see the price extend itself to the 1.272 level and then move to the 1.382 level.
With your understanding of the extension, you will now be able to understand how this forex Fibonacci trading system works.
First of all, you need to setup either the Stochastic or RSI to help to identify whether the market is oversold or overbought.
Next, you need to setup a MACD indicator to help you identify the right time for entry.
Once you got this 2 indicators setup, you will need to draw Fibonacci whenever you see a swing high and a swing low. All you need to do is to wait for the price to retrace back to either one of the 3 levels and then check your indicators for signal. If the price did not retrace but continue to move higher or lower, you just have to remove your Fibonacci and then redraw them again with the new swing highs or swing lows.
Whenever you see the price retracing near a level, you should check your indicators for the following
1) If you are in an uptrend and you see the price retracing back to the 0.500 level, you should check your Stochastic indicator to see if the market is oversold or not. If it is indeed oversold, you should then move on to see your MACD indicator and wait for the histogram to flip over to the upside again before you enter your trade.
After you have entered a trade, your exit strategy is equally important. You will usually exit your trade 10 pips before the expected extension and you should always place a stop loss around 20 to 30 pips below the level of retracement
If your Fibonacci retracement levels coincide with a major support or resistance level, this will give you more strength in that level and thus increase your chance of winning.
Do not start to trade immediately with this forex Fibonacci strategy. You should always try any new strategy out on your demo account and then move it to live only when you are able to trade profitable with it consistently.