This article is going to take a leap of faith and assume you understand the basics of Fibonacci retracements and extensions. If not, have no worry. Here is a great resource to obtain such information.

Fibonacci is an incredible tool to determine possible price reversals. The key is to not go in with an assumption on where price will reverse. It is well known that the 61.8 retracement line is a fairly significant reversal point. So much as they consider that line to be the Golden Ratio. However, if you were to solely place trades at that line you would be setting yourself up for disaster as Forex could care less where you place your limit orders. Let the big players push around price. Figure out where they are moving price, make your entry, and exit before price reverses on you again.

Price will always tell you where it’s going. Allow me to give you an example.

I drew the Fibonacci lines from the high of the evening star, to the low of the pin bar. As price dictated, it hit around the area of the Golden Ratio and headed south fast. However quick movements can catch rebounds, so it would be important to wait for price to continue moving in the direction we believe it to move in. So here I would wait until it moved ten pips below the low of the pin bar and make my entry there.

Now that we are in the trade, where would we take profit? This is where Fibonacci extensions come into play.

The above picture shows the same movement, except this time the Fibonacci lines were drawn from the low of the pin bar to the top of the evening star pattern. This created a Fibonacci extension. Our expectation is to wait until price starts showing signs of reversal around one of the extensions. The first and most famous extension is the 161.8.  As you can see, price started pushing away from the 161.8 line. This would have been an excellent opportunity to take profit. As mentioned before, Fibonacci is a great tool. However, learning price action is a must to ensure success trading this method.

We have listed a number of forex trading brokers who provide platforms that allow you to trade using Fibonacci. Remember to always try a new method on a demo account before trading it with real money.

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