This Forex Fibonacci strategy which is exclusive to the daily charts is meant to show traders how to trade long term trade continuations following a profit-taking retracement.
It is a complete FX strategy which uses the Fibonacci retracement tool for trade entry and the Fibonacci extension tool for trade exit. Choose the contest to test it.
We are seeing from the financial markets that there have been some huge long term trends in 2014. Fuelled by stimulus packages from various central banks, several underlying assets are showing huge long term movements.
In between these long term trends, early birds and traders with large positions sometimes like to take some profits off the table, leading to retracements. When price has retraced to a level where traders feel that prices are cheap enough for re-entry, they will get in and their orders will cause prices to move in the direction of the trend once again.
The goal of this strategy therefore is to:
- Identify these re-entry points;
- Identify a suitable exit area once the re-entry trade is in progress.
Indicators Used in Fibonacci Daily Chart Strategy
This strategy will require the use of three indicators:
- The Fibonacci Retracement Tool
- The Fibonacci Extension Tool
- The Stochastics indicator set to 10,3,3.
Charts Used in Fibo Daily Chart Strategy
This strategy is designed for use on the daily charts. This is because this chart is the least that can be used to determine the true long-term trend of the currency pair to be traded.
The long trade takes advantage of a dip in prices from a currency pair in an uptrend. The trade strategy is to buy on the dip. But what constitutes the dip?
- Trade entry
When profit taking has commenced, it is necessary to identify when this profit taking will end. The method displayed on the chart below is one way to do this. It has been found that when the Stochastics indicator is applied to chart, the Fibonacci level at which the lines of the indicator show an oversold level marks the point at which continued down-retracement of prices will end, for buying re-entries to occur.
Long Trade setup
First, start the trace with the Fibonacci retracement tool from the lowest point visible on the time frame, to the highest visible point. Please note that since the chart is in evolution, you will not get a complete picture as shown above. Rather, you will be able to see the various Fibonacci levels initially.
As the price action evolves, the Stochastics indicator will also evolve along with price action. It is when the price action settles at a Fibonacci retracement level at the same time that the Stochastics indicator is oversold (i.e. <20) that you can set your BUY trade at that point.
- Trade exit
The trade exit is determined by the Fibonacci extension tool. The exit area is the 61.8% or 100% Fibonacci extension level as the first target, and the 161.8% Fibonacci extension level as a 2nd target if the move will allow it.
This chart says it all. It is assumed that the trace is performed after the re-entry trade has been made. The trader selects the Fibo extension tool from the platform, and using the same landmarks as Fibo retracement tool, the trader starts from the swing low to the swing high on the chart, then extends the right arm of the tool to the Fibo level at which the re-entry trade was made.
In this example, the Take Profit area was at the 100% Fibonacci extension (FE) area.
The short trade is a reversal of the long trade, and takes advantage of a brief retracement rally in prices after a currency pair has been in a period of sustained downtrend. The trade strategy here is therefore to sell on a rally.
- Trade entry
Profit taking in a downtrend will cause prices to rally to some extent. This is only a brief upside retracement, and selling on the asset is expected to continue.
Our job as traders is to identify the point at which to sell on the rally. We apply the Stochastics indicator to the chart, take the trace from the swing high to a swing low using the Fibonacci retracement tool, and then look for the Fibonacci retracement level which corresponds to the Stochastics indicator being overbought (>80). The trade entry must be made at the open of the next candle as shown.
Short Trade setup
It is important to understand that because this is a daily chart, it will take 24 hours for a candle to form. So only enter at the open of the next day’s candle.
- Trade exit
For the trade exit, we use the Fibonacci extension tool. The exit area as usual will be the 61.8% or 100% Fibonacci extension level as the first target, and the 161.8% Fibonacci extension level as a 2nd target if the move will allow it.
Using the same landmarks as the Fibonacci retracement tool, the trader starts the trace of the tool from the swing high to the swing low on the chart, then extends the right arm of the tool upwards to the Fibo level at which the re-entry trade was made.
In this case, we can see that the Take Profit area was the 61.8% Fibonacci extension area.
There are many currency pairs which have been trending heavily for some time, fuelled especially by the strength of the US Dollar for most of 2014.
Therefore, there will be opportunities to use this strategy on several USD-paired currencies before the year runs out. Since Fibonacci Daily Chart strategy is a universal long term Forex strategy you can use it to analyze the huge long term market trends in the upcoming 2015.