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Fibonacci is an indicator that is quite widely used by traders to analyze price movements. Fibonacci itself consists of many types such as retracement, time zone, expansion, fan and arcs. However, in this discussion we will focus on the Fibonacci retracement.
Fibonacci Options on the MT4 Screen
From the name, Fibonacci retracement is a Fibonacci which measures the strength of price movements by calculating possible reversals. This indicator has values ranging from 0 to infinity, but the benchmarks are 0, 23.6, 38.2, 50, 61.8 and 100 even 123 and 161. These numbers are automatic settings when we apply this indicator to the MT4 chart screen. This figure is obtained from the division of golden number 1.6 which is a characteristic of Fibonacci.
This indicator is often used by reliable analysts, because it can predict the strength of buyers and sellers at the same time by measuring the value of a currency reversal. The interface is also quite simple and clearly visible, although it requires a little adjustment when the application started.
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Display of Fibonacci Retracement on the MT4 Screen
As mentioned above that this indicator requires a little adjustment, how to install this indicator is as follows:
- Determine the highest point and lowest point in one period
- If the trend is down (like in the picture above) then the Fibonacci is pulled from the highest point to the lowest point.
- Conversely, the trend is seen in an upward condition, Fibonacci drawn from the lowest point to the highest point.
- Make sure the Fibonacci lines are at the lowest or highest points, don’t cross the candlestick.
The question then arises, why do we take it from the highest when the trend is down (and the lowest point when the trend is up)? As the name implies, we will look for how strong the candlestick reverses whether to return to the original level at 100 or only up to a certain level. If the 0 point is exceeded, it means that the price will continue the trend and therefore we should follow.
Automatically, when it is firstly applied, the cursor will show fibo 100, we just hold the cursor and drag it up or down according to the guidelines above. What if the trend is not going up or not going down (sideways)? then we check some time back, where the previous tendency of the candlestick was seen. It’s easy enough to apply this indicator on the MT4 screen.
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How do trading system use Fibonacci retracement?
As the name implies, this Fibonacci tends to lead traders to follow the trend that is seen. The important point as mentioned above is the entry point to place the order we want. The 0 point does not become the entry point to place a position order because it is the starting point and benchmark of reversal.
Suppose we see a picture, we will sell at point 23.6. Then we set our order at that point and we wait until the candlestick touches that point. Likewise with other values such as 38, 50, 61 and 100, all of which have the potential to be a price turning point. Especially for 100, if it has passed this point it means that a trend reversal will occur.
If a trend reversal has occurred, then there are two options we can take. First, entry at 100 and then we take the target to 161. Second, we wait for prices to move to form a new high, then then install a new Fibonacci retracement to measure the potential reversal of the next trend. Automatically, if we take the second option then the existing Fibonacci retracement must be deleted because it will be replaced with a new one.
What about Stop Loss and Target Profit?
There are several approaches to managing Stop Loss (SL) and Target Profit (TP). The first is to make the Fibonacci point itself. For example we open positions when the candlestick is at 61.8 Fibonacci then we can set SL and TP (depending on the type of position) at Fibonacci 100 or Fibonacci 50. If we feel too close, we can take the next Fibonacci level as SL or TP points. Look at the picture below.
Example of Entry Points and TP
For example, it is seen that the price responds to the 23.6 level then continues to rise. We can set the previous entry at this level with a profit target at the level of 38.2 from Fibonacci. However, if it is felt to be lacking, we can set the TP at a point above it like 50 or 61.8 depending on the reversal strength. We can then set SL at the 0 Fibonacci point. As such an example of using this indicator is simple and easy.
The above method is the most common. But there are also those who use the number of pips approach (30, 50 or 100 pips) and there are also with the help of other indicators. There is no problem for this, but it should be noted that the indicator display does not make the screen look “full” and too much. This second approach is rarely used by most traders.
Always remember, prioritizing SL points is compared to TP, because we must measure risk first before calculating the benefits we will achieve. All traders want to get profit, but not all can survive with losses.
What to Look For?
Fibonacci indicators can be a simple trading system but profits can be utilized properly. This forex trading strategy can generate consistent profits while following the rules that we set, especially in terms of SL and TP placement. Therefore, the placement of SL and TP is something that must always be done in this technique.
Fibonacci retracement does not indicate the possibility of 100% the price will reverse direction. Don’t get the wrong perception when a candlestick touches a certain value, the price will reverse. In fact, sometimes the candlestick continues to break one level to the next level, therefore be aware of the movement of the candlestick especially before the release of a news or announcement and speech from the central bank.
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This indicator is basically suitable for any time frame. Different from other indicators which calculations are based on the values that exist in the candlestick, the Fibonacci retracement is a device which calculations are standard and only “pasted” to the existing candlestick. Thus, there is no market influence going up and down on the Fibonacci value.
Moreover, if we apply it to a candlestick in a small time frame, Fibonacci will look too dense and it is difficult to measure risk. Meanwhile, if you use a large time frame, the distance between Fibonacci levels will be far and this also troubles us in terms of determining TP and SL. A suitable timeframe for this indicator is 1 hour (H1) to 1 day (Daily / D1).
Back again, there is no perfect system. Always set SL in every will start trading because forex trading is a high risk. Do not increase the risk by doing things that endanger the capital we have.