The 61.8% Fibonacci Forex Trading Strategy is a very basic Fibonacci trading system based on the 61.8% Fibonacci Retracement level.
Here’s how it works:
- sometimes, when price is in an uptrend, it will eventually retrace/reverse back down to the 61.8% Fibonacci retracement level and then shoots up from that level.
- similarly but the opposite also happens in a downtrend, price will rise up in a downtrend to the 61.8% fibonacci retracement level and then shoot down again from that level.
Knowing this behavior, we can build trading rules around how to trade this price behavior.
- you must know how to draw Fibonacci retracment levels on the charts
- currency pairs: any
- timeframes: 5 minute and upward
- forex indicators: none required.
- additional tip: look for levels of confluence that coincide with the 61.8%…this gives more “punch’ to the validity of any buy or sell signal that will be generated.
The Buying Rules
- Price must be in an uptrend and it makes a peak and starts reversing down
- Use the fibonaci drawing tool on the MT4 trading platform and draw the retracement levels using the “bottom” and the “peak” of the price chart and wait for price to go down to the 61.8% level.
- When price hits the 61.8% level, look for bullish reversal candlestick patterns to buy. Place pending sell stop order 1-2 pips above the high of the bullish candlestick pattern
- Place your stop loss anywhere from 2-10 pips below the low of the bullish candlestick pattern
- Options for take profit: use risk to reward of 1:3 to calculate your take profit target level or you can use previous swing high peaks like TP1 and TP2 shown on the chart below and place your take profit order there.
The Selling Rules
- Make sure price is in a downtrend and it makes and it makes a “bottom” and starts reversing up.
- Using the fibonacci drawing tool, draw retracement levels on the chart and wait for price to head up and hit the 61.8% retracement level
- If a bearish reversal candlestick forms in that selling zone, place a pending sell stop pending order 1-2 pips below the low of the bearish candlestick
- place your stop loss order anywhere from 2-10 pips above the high of the bearish reversal candlestick
- for take profit targets, you can use previous swing lows are your take profit target levels or calculate it based on risk:reward of 1:3
Disadvantages Of The 61.8% Fibonacci Forex Trading Strategy
- as will all forex trading strategies, everyone has limitations and for this, sometimes, you will see price will not respect the 61.8% level but will just bust through it.
- trading with lower timeframes can be an issue as there is tendency for too much “noise” and you as the trade will fail to see the bigger picture.
Advantages Of The 61.8% Fibonacci Forex Trading Strategy
- A very simple price action trading system to implement
- if and when those reversal candlestick used as your signal to buy or sell are true/accurate, the you are effectively buying at the very bottom or the top of a price swing which means…
- that you your risk:reward is really excellent