Best forex fibonacci trading strategy 2023

Before we look at applying the Fibonacci sequence to trading, we need to take a closer look at the sequence itself and understand its unique mathematical properties. Put simply, the Fibonacci sequence is a string of numbers where after 1 and 0, every subsequent number is the sum of the two previous numbers. This gives us:

0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987, 1597, 2584, 4181… ad infinitum.

Fibonacci trading strategies are built around the relationships between these numbers. Of course, there are infinite ways of interpreting a string of numbers, but we will look at a few specific applications.

For example, dividing one number by its successor will give a figure of 0.618 and if you divide a number by another two places higher it will approximate to 0.382. Both of these figures come into play when creating a Fibonacci trading sequence, as we shall see.

So, what do these numbers have to do with forex trading? The idea is that in a market uptrend, you buy on a retracement, having identified a Fibonacci support level, while during a downtrend, you sell at a Fibonacci resistance level. We can use the numbers 0.618 (61%) and 0.382 (38%) as a basis for building these levels, as follows: 

Retracements

A retracement is a means of identifying a potential change in the price direction of an asset. We can use the Fibonacci trading strategy to find key levels of support and resistance in previous price movements, the theory being that after a surge in price movement, the market will return to a particular point before continuing in its initial direction. 

Typically, traders use the Fibonacci figures of 38.2% and 61.8%, along with 50%, to draw retracement levels across the chart and identify price levels of support and resistance where a reversal in direction is most likely, which in turn can be used to find suitable entry levels. Note that the 50% level is not derived from the sequence, but is generally included in the strategy.

Extensions

The next stage in building a Fibonacci trading strategy is to identify extension levels. Extension points are used to identify potential exit points. Here, we use Fibonacci numbers extending beyond 100% – for obvious reasons. Using simple sums based on the sequence gives us the key extension points: 61.8%, 261.8% and 423.6%. Once again, we use these figures to draw our potential exit points. Simply put, if we use the Fibonacci retracement levels to find the entry point to a trend, then the extension levels are used to find the end of that trend.

At this stage, you might be wondering exactly how you draw the Fibonacci retracement levels onto your trading platform window. The good news here is that any reputable operator will have numerous tools to help you achieve this. In fact, many will even automate the process completely, meaning you just have to select the relevant options.  With nextmarkets, for example, you’ll find the FibR tool will allow you to add your retracement lines without having to do any calculations for yourself.

There are a few potential weaknesses in the Fibonacci approach that traders should be aware of:

Reliability

The Fibonacci strategy requires the retracement levels to be drawn at the correct time for them to be useful. As we noted above, they need to be in place following a price swing, when the market has levelled out. As such, they are time-limited. The forex market moves notoriously quickly so setting the 61.8% retracement level on a monthly chart will likely be more reliable than the same line drawn on an hourly chart. You should therefore see this as a more reliable indicator over a longer time period.

Consistency

In the past, novice traders have been known to be inconsistent when drawing Fibonacci lines onto a trading chart – failing to set the points candle body to candle body or wick to wick, which inevitably leads to inconsistent results. Nowadays, much of the process is automated, but it’s important to ensure you are using the Fibonacci tools correctly and – most importantly – consistently, by ensuring you are using the same settings and format whenever you apply the Fibonacci strategy. You’ll also want to make sure you are aware of all the different options available when using Fibonacci software.

Selection

Another potential shortcoming with the Fibonacci strategy is that you need to be able to identify where and when the market swing points are. This might seem simple enough, but everyone has their own way of looking at charts and using different time frames can dramatically change how you see market events. You’ll need to give this some thought – especially if you are new to the markets and have yet to form your own habits and particular way of viewing charts.

Most top-level traders will apply strategies at some stage and the Fibonacci has long been held in high esteem. Having a standardised way to set your technical indicators is certainly going to be a plus point and will go a long way to helping you become a better, more consistent trader. 

The great thing about the Fibonacci sequence is it remains constant – whether you trade EUR/USD or trade GBP/USD, the approach remains unchanged. However, it’s worth noting that there are plenty of other indicators out there, such as the moving average (MA), the exponential moving average (EMA), the Stochastic oscillator, and the moving average convergence divergence (MACD). You should be aiming to use the Fibonacci strategy in conjunction with at least one other approach. 

By now you should have an idea of the Fibonacci strategy and how to apply it to charts. We’ve also pointed out some of the pitfalls to be aware of. If you plan on giving it a go, we’d suggest doing so with a gradual approach – make a few small trades with the strategy and ensure you know exactly how it works. If it fits well with your trading style, you can then start rolling it out as a mainstay of your regular trading.