Monday, July 28, 2014

My Forex Fibonacci Trading System

April 13, 2010 by  
Filed under Fx Tutorial


If you have read my previous post showing you how to plot the forex Fibonacci indicator on your chart, you will understand the power of the 0.382, 0.500 and the 0.618 Fibonacci retracement level. These retracement levels are areas where you will the price being repelled by them. What makes Fibonacci trading such a popular system is because of its ability to predict the subsequent movement of the price which is through its extension.

Here is how the extension works:

1) When you see the price retracing to the 0.618 level and then being repelled by it, there is a high chance that the price will extend itself to the 1.618 level.

2) When you see the price retracing itself to the 0.500 level and then being repelled by it, there is a high probability that you will see the price extends to the 1.500 level or even 1.618.

3) If you see the price retracing itself to the 0.382 level and then repelled by it, you will most probably see the price extend itself to the 1.272 level and then move to the 1.382 level.

With your understanding of the extension, you will now be able to understand how this forex Fibonacci trading system works.

First of all, you need to setup either the Stochastic or RSI to help to identify whether the market is oversold or overbought.

Next, you need to setup a MACD indicator to help you identify the right time for entry.

Once you got this 2 indicators setup, you will need to draw Fibonacci whenever you see a swing high and a swing low. All you need to do is to wait for the price to retrace back to either one of the 3 levels and then check your indicators for signal. If the price did not retrace but continue to move higher or lower, you just have to remove your Fibonacci and then redraw them again with the new swing highs or swing lows.

Whenever you see the price retracing near a level, you should check your indicators for the following

1) If you are in an uptrend and you see the price retracing back to the 0.500 level, you should check your Stochastic indicator to see if the market is oversold or not. If it is indeed oversold, you should then move on to see your MACD indicator and wait for the histogram to flip over to the upside again before you enter your trade.

After you have entered a trade, your exit strategy is equally important. You will usually exit your trade 10 pips before the expected extension and you should always place a stop loss around 20 to 30 pips below the level of retracement.

Fibonacci Trading Example 1

2) If you are in a downtrend, the conditions that are stated above shall be reversed.

Fibonacci Trading Example 2

If your Fibonacci retracement levels coincide with a major support or resistance level, this will give you more strength in that level and thus increase your chance of winning.

Do not start to trade immediately with this forex Fibonacci strategy. You should always try any new strategy out on your demo account and then move it to live only when you are able to trade profitable with it consistently.

I have received emails from reader of my blog asking me to teach them the right way to use the Fibonacci indicator. In fact, I have created a course that teaches you 4 of my profitable forex strategies and 1 of them requires the use of the Fibonacci indicator. For more information, you can take a look at the link below.

Click here for the Fibonacci Course

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Comments

38 Responses to “My Forex Fibonacci Trading System”
  1. amir says:

    hi dear kelvin

    how we can know about trend. because if we draw wrong trend we cant have true trend line.

    how you detect trend ???

    • Kelvin says:

      Hi Amir

      You can detect a trend using the 200 EMA. When the 200 EMA is sloping with good gradient in a particular direction, it is showing you that the trend is currently very strong in that particular direction.

  2. Anthony says:

    Hi Kelvin,

    Can I use this method for trading gold and silver?

  3. Ben says:

    Hi Kevin,

    I’m studying your Fibonacci trading. Can you please tell me which TimeFrame you’re using?

    Thanks,
    Ben

    • Kelvin says:

      Hi Ben

      I am using them on the 15 minutes and hourly chart. It does not really matter as it works for all time frame.

  4. Tony says:

    Hi Kelvin,

    Can I use this trading system for all pairs?
    Thanks

  5. jainendra says:

    hi kevin, your articles are very good indeed. i keep coming back to ur website. i am a newbie in forex and treding demo for 3 months. my question regarding fibonacci is very basic, how could i confirm that price after reaching a certain fibonacci level is held by it? price, as i have seen, after reaching certain fibonacci retracement level tests it several times.

    • Kelvin says:

      Hi

      There is no way you can confirm that the price is going to be held by it as there is nothing 100% in trading. What we are saying is there is a higher probability that the price is going to be held by the Fibonacci level and not 100% will be held by it.

      However to give us a higher probability of winning, I usually wait for the price to close above or below the fibonacci to make sure that the price respect that level before I enter a trade. In order to increase your probability of winning, you can make use of multiple fibonacci as the price will more probably be held by multiple fibonacci on the same level than 1 fibonacci level.

  6. Lenna says:

    Your answer lifts the intelligence of the debate.

  7. Jay says:

    Hi Kelvin,
    What are the parameters for the macd and stochastics?
    Thanks.

  8. Richard says:

    Hi Kelvin,great work you have there.Pls what is the settings of the above indicator(Stochs and mac d).Thanks

  9. Glenn M says:

    Hi Kelvin,

    Thanks for the lessons that you provide. Regarding the way that you set the fib levels, I still believe that you are pulling the lines backwards. The lines should be started at the beginning of the move and pulled to the end of the move. This results in the retrace first hitting the 38.2 level, then the 50% retrace, followed by the 61.8% level. It doesn’t make since that a retrace of the move first hits the 61.8% retrace of that move. In any case, trading fib reverses with secondary confirmation has been a very profitable strategy. Again, thanks.

    • Kelvin says:

      Hi Glenn

      I understand your point. Your 38.2 level is actually my 61.8 level. Your 38.2 level is telling you that the market is retrace by 38.2% and my 61.8 level is telling me that the price is now at 61.8% of the full swing. In fact, there are the same thing but that is how the Fibonacci level on my trading platform works.

      If I pull it the way you suggest, my extension will not be on the right side.

      Really grateful that you bring this up as I believe that it does help to clarify things up for those who are also confused.

  10. sani says:

    hi kelvim , first of all i want to thank u for giving free tutorial . i want to know what frame time is more suitable applying the fibo. can it be used in small time frame? (5 min ,15 min )

    • Kelvin says:

      Hi Sani

      In fact, the Fibonacci levels are suitable for all time frames. You can definitely draw it on a smaller time frame.

      • sani says:

        Hi kelvin.thanks very much for ur help. You had gave me a lot of valuable knowledge in forex. im a new trader and a losser but now im more confident to trade. Im gaining profit using demo account but now i will continue to see the progress and wait until one month and see how much i gain.

        Regards,
        Sani

  11. abhhishek says:

    Hi Kelvin,
    I have set fibonacci level but i drag it low level to high level.is it right ?

    • Kelvin says:

      Hi Abhhishek

      It depends on whether you are in an uptrend or downtrend. If you are in an uptrend, you just have to make sure that your extension for the 1.272 and 1.618 is upward and if you are in a downtrend, you have to make sure that the extension is downward. Do let me know if you have any problem.

  12. Kingsley says:

    Hi,

    I can’t still find help to setting fibonacci after following your link. It is difficult for me setting the parameters on my platform,0.382,0.500,0.618,1.272,1.382,1.500,1.618. maybe a more precise broader way of doing this will be of greater help to newbies like us.

    Thanks

    Kingsley

    • Kelvin says:

      Hi Kingsley

      In that case, you need to check with your broker on how you can plot Fibonacci on your chart. For me, I just have to select a high point and a low point and the system will automatically plot for me the levels.

  13. ray says:

    can u teach me how to change the MACD indicator to the one you use cos the one in my MT4 didn’t come like this thanks and i ll like it if u can send the reply to my mail

  14. Nelson says:

    Hi Kelvin

    I was back testing this strategy that you shared on the EURUSD for Year 2010, and the accuracy looks great. However, in the current downtrend, the MACD has not had any flip at all, as all of them are always on the low side. In this case, is there any ways to customize this strategy for such situations?

    Thanks and regards
    Nelson

    • Kelvin says:

      Hi Nelson

      Personally, if there is no flip on MACD, I will not enter any trade and wait for it to occur. The key to sound trading lies in your adhesion to your trading plan and that is the only way you can profit from the market.

      Alternatively, you can move on to other currency pair to look for trading opportunity while waiting for the right setup on EURUSD.

  15. praks says:

    Hi Kelvin,

    Please teach me how to set the FIBONACCI levels as i am new to this.

    Many thanks

    Rgds
    Praks

  16. chips says:

    Thanks for the tutorial, it has claried awhole lot for me as a new trader.
    I just demo-ing for now..so far it lost and win using leading and lagging indicators.
    I think by far FIB has open the doors for me, I can set my profit margain ahead, exits and entry points,and identify the type of trade for the day.
    I do thank you,

    Thanks

    • Kelvin says:

      Glad that you find the information useful for you. Demo trading is one of the most important part of your trading career. Treat it like live trading and horn your skill there. You will be able to trade profitably one day.

  17. chips says:

    Do you use a automated trading platform for your trades

  18. dan says:

    nice ,but must be tested.

    • Kelvin says:

      Hi Dan

      I am glad that you are testing the strategy out before trading with it. Just a reminder to all my blog readers, you must always try out a new strategy on a demo account before applying them.

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