# Fibonacci Tool Trading in Forex

• Fibonacci is a sequence of numbers that can indicate a pattern of progression for a specific pair
• The tool is great to identify trends, support, and resistance and etc.

## Curious About Fibonacci But Unsure Whether To Use It?

Did you ever think about using the Fibonacci tool for analyzing price charts? Or perhaps you tried using Fibonacci levels but you did not manage to use it properly?

The Fibonacci tool is a highly effective tool for analyzing and trading the Forex and CFD charts. It not only offers important support and resistance levels but also valuable spots for entry and exit.

## What Are Fibonacci Sequence Numbers?

The Fibonacci sequence number is a mathematical term. Each number is calculated by the two preceding numbers, starting from 0 and 1.

This is how the Fibonacci levels are calculated:

• 0 + 1 = 1.
• 1 + 1 = 2.
• 1 + 2 = 3.
• 2 + 3 = 5.
• 3 + 5 = 8.

As you can see, the last two numbers are added to get the next number. So when 2 + 3 = 5, then the next sequence starts with 3 + 5, which gives us the next number 8.

The Fibonacci sequence is thus:

• 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987, etc.

These Fibonacci numbers are named after the Italian mathematician Leonardo of Pisa, later on known as Fibonacci. The Fibonacci concept was introduced in his book Liber Abaci in the year 1202. Now let’s explain the Fibonacci tool trading definition, which is a useful Fibonacci trading analysis tool.

## What Are Fibonacci Ratios?

The Fibonacci levels appear frequently in mathematics. But they also appear in biology and nature. For instance, branches in trees and the flower of an artichoke are just two examples but many more are available.

Fibonacci levels also play a key role in price charts and financial markets. The Fibonacci sequence levels are used to create Fibonacci ratios and are a Fibonacci tool in Forex trading. Let’s review these Fibonacci trading “ statistics”.

The first number is divided by the next number for the highest ratio:

• 21 divided by 34 = 0.618 or 61.8%
• 233 divided by 377 = 0.618 or 61.8%
• 55 divided by 89 = 0.618 or 61.8%
• Regardless of the numbers, the ratio stays the same.

The first number is divided by the second next number for a lower ratio:

• 21 divided by 55 = 0.382 or 38.2%
• 233 divided by 610 = 0.382 or 38.2%
• 55 divided by 144 =0.382 or 38.2%
• Regardless of the numbers, the ratio stays the same.

Simply said, Fibonacci ratios are created by dividing one Fibonacci sequence level with another Fibonacci sequence level. Here is a summary of the most important Fibonacci ratios:

• 61.8% Fibonacci retracement level
• 50% Fibonacci retracement level (this level is debated whether it is really a Fib ratio)
• 38.2% Fibonacci retracement level
• 23.6% Fibonacci retracement level

Other Fibonacci ratios are:

• 78.6% Fibonacci retracement level (square root of 61.8%)
• 88.6% Fibonacci retracement level (square root of 78.6% Fib)
• Although traders use this level, the 76.4% Fibonacci level is not a Fib level

These levels represent Fibonacci retracements (more explained in the next paragraph). Some traders claim that the best Forex Fibonacci strategies are based on that.

The Fibonacci sequence levels can also be turned around and dividing the larger number by the smaller number. Those ratios represent Fibonacci targets (rather than retracements):

• -27.2% Fibonacci target
• -61.8% Fibonacci target
• -100% Fibonacci target
• -161.8% Fibonacci target
• -200% Fibonacci target
• -261.8% Fibonacci target
• -423.6% Fibonacci target

These retracements and targets are Fibonacci tradings explained and often a part of Fibonacci day trading. Using these Fibonacci levels is at the heart of most Fibonacci tool trading strategies.

## Why Are Fibonacci Ratios Important In Forex & CFD Charts?

Both the Fibonacci retracement levels and the Fibonacci target levels offer numerous advantages when analyzing and trading the Forex and CFD charts. It’s time for a Fibonacci tool trading definition.

Fibonacci retracement levels can be used for the following reasons:

• Adding key support and resistance (S&R) levels to the chart.
• Better estimating where price could make a bounce at S&R.
• Finding better entry points. With the trend: directly at the Fibonacci retracement level(s). With the trend: after price bounces at the Fibonacci level(s). Countertrend: at the Fibonacci target(s).
• Finding better exit points. With the trend: at the Fibonacci target(s). Countertrend: at the Fibonacci retracement level(s).
• Understanding when an impulsive price swings and the Fibonacci level becomes invalid (if price breaks through the 100 level). This level often works best for placing a stop loss.
• Understanding when the trend could become overextended as price action reaches further and deeper targets.

As you can see, the Fibonacci tool in Forex trading offers critical information about the most important parts of trading: entries, exits, price swings, and S&R. It is a very viable tool.

It’s not surprising that many traders add the chart tool in their toolbox.

## How Do You Draw The Fibonacci Tool On The Chart?

The Fibonacci tool is a very valuable tool. But it does take some training before traders can use it properly. It’s now time for our next segment: the Fibonacci Forex tool explained.

The Fibonacci tool needs to be drawn manually by the analyst and trader. This is not a fully automated indicator.

This means that the analyst needs to know where to place the Fibonacci tool. This requires time to learn. And traders are prone to make errors, especially when they just started.

This is valid for whether traders use it for Fibonacci day trading or just as a Fibonacci trading analysis tool.

Here are some critical tips to learn quicker and with fewer difficulties.

### Use With Trend

The Fibonacci levels are the most valuable when trading with the trend:

• Fibonacci levels offer traders a discount within the trend. The Fibonacci level is a way for traders to get into a trend at a pullback (discount).
• Trends usually make a pullback – sooner or later. Each pullback will be different: some will retrace just a little, others will retrace a lot. You can measure the depth of the pullback via the Fibonacci Forex trading tool.
• When the chart is ranging, the price usually does not respect the Fibonacci levels. In that case, price action usually goes to the previous tops and bottoms and using the Fibonacci Forex trading tool has no advantage.

### Place On Impulse Or Candle

Besides the presence of a trend, the Fibonacci levels are best placed on a strong and impulsive price swing:

• Corrective price action is indicating indecision and is not the best for using a Fibonacci level.
• A clear impulsive price swing is usually a good sign that price action will respect the Fibonacci levels of that swing.
• Another way to use the Fibs is by placing the Fib tools on a strong candle. Usually, candlesticks of a higher time frame are more valuable.
• Fibs can also be placed on strong impulsive price swings against the trend (as a larger correction often takes place).

### Place The Fibonacci Forex Trading Tool Correctly

This means placing it from the left of the chart to the right side of the chart (some traders prefer the other way around but most use this technique):

• In an uptrend, place the Fibonacci tool in Forex trading from left to right, from bottom to top.
• In a downtrend, place the Fibonacci tool in Forex trading from left to right, from top to bottom.
• This way, the Fibonacci targets are placed on the correct side: on top (for uptrend) and at the bottom (for downtrend).

### Great Match With Price Swings And Elliott Waves

The more you know about price swing and Elliott Waves, the better you become at placing the Fibonacci Forex trading tool:

• Price swings are the key ingredient for placing Fibs and understanding price waves.
• That is also why most wave traders use Fibonacci. Fibonacci and waves go hand in hand. Both tools compliment each other very well.

In any case, it helps a lot if traders do not place the Fibonacci Forex trading tool on a very small or very large piece of the chart. Try to focus the Fibonacci on a price swing that makes visual sense.

By the way, interested in seeing the price level of every Fibonacci level shown on these charts?

A simple pro tip is this: add a space, percentage sign, and then USD sign to see the price levels behind the Fibonacci levels (see image below).

## How Can Traders Use The Fibonacci Forex Trading Tool For Entry And Exit?

The Fibonacci tool in Forex trading is an excellent method for finding entries and exits. But of course, the trading accuracy does increase when traders use it in confluence with other tools and indicators.

That is why it is key to use other support and resistance levels for identifying strong POC zones (point of confluence), besides spotting the trend and an impulse (as mentioned in the paragraph above).

There are multiple ways of finding trade setups with the Fibonacci tool when trading Forex and CFD markets.

### Trading At The Fibonacci Level Directly

• Traders can use pending orders at the Fibonacci levels or use market orders once the price has reached the Fibonacci zone.
• This style offers potentially the best entry but it is often the riskiest too. Price action can also break the Fibonacci level against the direction of the trade.
• This direct entry at the Fibonacci level is best used if there is a lot of confluence at a particular support and resistance zone.

### Trading The Reaction (Bounce) After Price Hits The Fibonacci Level

• Traders can use market orders once candlestick patterns confirm a price reaction to the Fibonacci level. Candlestick patterns at the Fibonacci level for instance could be one way of trading close to the Fib.
• This style offers potentially the second-best entry level but it is less risky. Why? Because traders can already see that price action is responding to the Fibonacci level and hence there is more evidence that a setup could work.
• This bounce entry at the Fibonacci level is best used for beginners or in cases when the S&R confluence is weaker.

### Trading The Breakout After The Bounce At The Fibonacci Level

• Traders can use pending or market orders for a breakout with the trend after price action to respond to the Fibonacci level. In this case, traders wait for the opposite S&R level to break.
• This style offers potentially the worst entry-level but it is the least risky. Why? Because traders have a better chance that the trend is about to restart after the breakout.
• This breakout entry at the Fibonacci level is best used when the counter-trend price movement is very strong.

This wraps our beginner’s article on the Fibonacci Forex trading tool and Fibonacci trading for beginners. We explained the following aspects of Fibonacci trading:

• We reviewed the Fibonacci sequence numbers and explained how they are calculated and used.
• Based on those Fibonacci sequence levels, we showed how Fibonacci ratios were calculated. We tried to offer a practical Fibonacci tool trading definition.
• Then we explained why Fibonacci ratios are important in Forex & CFD trading and charts.
• Another important aspect is how traders can draw the Fibonacci tool on the chart.
• Lastly, we discussed how traders can use the Fibonacci Forex trading tool for entry and exit.

## Detailed Info on Fibonacci Insights

### What Is The Fibonacci Tool?

The Fibonacci Forex trading tool is an indicator that traders must manually add to the Forex or CFD chart. Traders do that by choosing the start and end spot, which is usually placed on a price swing, candlestick, or candle pattern. The Fibonacci tool shows the Fibonacci retracement and ratio levels and/or the Fibonacci target levels. The Fibonacci levels indicate support and resistance level. They also can offer potential spots for entry and exit. Traders are interested in these entry levels because they indicate a retracement and discount within the trend. But keep in mind that the Fibonacci levels do not work well when the market is ranging (and not trending).

### How Do You Use Fibonacci Retracement?

The Fibonacci tool in Forex trading is an excellent method for finding entries and exits. The Fibonacci retracement levels are the most valuable when trading with the trend:

• Fibonacci levels offer traders a discount within the trend. The Fibonacci level is a way for traders to get into a trend at a pullback (discount).
• Trends usually make a pullback – sooner or later. Each pullback will be different: some will retrace just a little, others will retrace a lot. You can measure the depth of the pullback via the Fibonacci Forex trading tool.
• When the chart is ranging, the price usually does not respect the Fibonacci levels. In that case, price action usually goes to the previous tops and bottoms, and using the Fibonacci Forex trading tool has no advantage.

It is important to place the Fibonacci Forex trading tool correctly. This means placing it from the left of the chart to the right side of the chart (some traders prefer the other way around but most use this technique):

• In an uptrend, place the Fibonacci tool in Forex trading from left to right, from bottom to top.
• In a downtrend, place the Fibonacci tool in Forex trading from left to right, from top to bottom.
• This way, the Fibonacci targets are placed on the correct side: on top (for uptrend) and at the bottom (for downtrend).