Lesson #24 Plotting the Forex Fibonacci Retracement Levels

During and upswing trend, you have to go long on the market for a retracement to the support level of Fibonacci. Finding the retracement levels involve clicking significantly identifiable Swing Low. After that, you have to drag the cursor back to the most recent Swing High.

These actions will show individual retracement levels. Specifically, the levels will display the ratio and corresponding prices. Here are some examples of upward markets:

The chart is a 1 hour display for USD/JPY. The Fibonacci Retracement Levels can be plotted by selecting Swing Low on 07/12/05 at 110.78. Next, drag the cursor to select the Swing High on 07/13/05 at 112.27.

The software plotted the levels which you can see on the chart. Retracement Levels were the following: 111.92 (0.236), 111.70 (0.382), 111.52 (0.500), and 111.35 (0.618).

If the USD/JPY retraces from the high levels, it could be supported at one of the Fibonacci Levels. That is because most traders will place buy orders at these Fibonacci levels just as the market is pulling back.

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After the Swing High happened, it is now best to take a look at what actually occurred. The market retraced back to the 0.236 levels. The next day, the pull back breached the 0.382 level but never closed below this. Late in the day, the market stared to move up. If you bought at the 0.382 level, that would be a perfect decision for a short term trade.

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During a downtrend, the following steps could be followed on how to utilize the Fibonacci Retracement Levels.

The chart is a 1 hour representation of EUR/USD. The Swing High was plotted at 1.3278 on 12/28/05. The Swing Low was plotted at 1.3169.

The following are the Retracement Levels: 1.3236 (0.618), 1.3224 (0.500), 1.3211 (0.382), and 1.3195 (.236).

You should expect that if a downturn occurs, it will be met by resistance at one of the Fibonacci Levels. The traders will normally place selling orders at these levels especially because the market will try to launch a rally.

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The following scenarios happened. The market actually attempted a rally. However, the rally barely succeeded in passing the 0.500 level. A spike was experienced to a high of 1.3227 but the market closed below this level.

You will notice that the market rally was reversed and the downward movement continued to spiral. You could have made a killing if you sold at 0.382 level.

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Another example was shown in the following chart. This is a 1 hour representation of GBP/USD.

The Swing High was plotted at 1.7438 on 07/26/05. The Swing Low on the other hand was plotted at 1.7336 for the next day. Here are the Retracement Levels: 1.7399 (0.618), 1.7387 (0.500), 1.7375 (0.382), and 1.7360 (0.236).

The chart indicated that the market actually tried to vault over the 0.500 level. However, it failed to succeed in its several attempts. The question is if you place a sell order at 0.500 level, would it still be a good trade.

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If you entered the market, you will surely lose some serious cash. Notice what happened at the market. The Swing Low dipped at the bottom for this particular downward movement while the market tried to rally above the Swing High Point.

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Based on these charts and examples, the Fibonacci Retracement Levels usually provide the market with temporary support and resistance.

You will find some problems with these because you will not be able to know which level will provide support. Based on the chart, the 0.236 level tends to provide the weakest support or resistance. Meanwhile, the other levels provided similar support or resistance with the same frequency.

The chart showed that the market usually retraced to 0.382 level. However, this is not always the case. It is not a guarantee that the price will reverse if it touches this level.

Sometimes, you may notice that the price will hit the 0.500 level and then proceed to reverse. Sometimes also, the market will completely ignore the Fibonacci and blow everything on its path.

You need to remember that the market will not automatically reverse to an upward swing if it finds support at such levels. Sometimes, the price will continue to slide down almost to the final Swing Low.

This is also the case if the market is experiencing a downtrend. The market may opt to ignore everything and decide to swing up even above the final Swing High.

Putting a stop therefore is a significant challenge. Probably, the best route to take is to place stops just under the last Swing Low if the market is moving up. The stop could be placed above the Swing High if there is a downtrend.

This option however involves taking too much risk compare to the potential profitability of the trade. You should be able to determine the ratio of reward and risk.

When studying advanced trading lessons, you will be able to learn essential money management techniques. You can also learn how to handle and manage risks by controlling the trades with favorable reward to risk ratios.

It is very important therefore to know how to determine the proper Fibonacci Retracement Levels for the Swing High and Swing Low. People will have different interpretations of charts, so different points can be plotted.

You need to live with the fact that there is a lot of guessing you need to make in determining the right level of the Fibonacci Retracement.