Fibonacci Forex Trading Strategy (FREE EA)

What is The Fibonacci Sequence in Forex?

A natural sequence that occurs in nature. “The golden ratio is about 1.618, and represented by the Greek letter phi, . study of the relationships between numbers, quantities, shapes, and spaces. relationship between numbers or numerical values.” Click here for more info on Fibo on the web.

Some traders bet their lives on it that they work on the markets as well. In my opinion, they work because the levels coincide with support / resistance levels, where real orders are actually in place.

combining support and resistance with fibonacci

Some of the popular fib numbers are 38.2 and 61.8, which traders use to enter on a retracament. These are levels in the market where a turning point is anticipated and are regarded as optimal entry points if you want to participate in the main trend. The 161.8 is also a fib number which traders use to project where the market is headed. It is often used as exit points or take profit levels.

Let’s talk about how we can combine fibs with our price action analysis below.

Price Structure – Uptrends & Downtrends

Learn to identify swing points and where the implusive waves are actually at. Impulsive waves are the moves which breaks previous highs and lows, while the corrective waves are the pullback waves. Spotting HH HL LH LL are one of the basics of price action trading and by understanding it, we can decipher if we’re in an uptrend, downtrend or a range.

GBPUSD downtrend

Fibonacci traders believe in the saying that The Trend Is Your Friend, Until It Bends. We’ve heard this saying many times and many legendary traders have sworn by its truth. After trading for many years, I mostly trade with the trend and barely make counter trend trades. It’s just easier if you’re going with the flow i.e. the impulsive wave, as more momentum is present and your TPs can be achieved faster.

If you’re trading with fib retracements, then you’d fall into this category of traders as well.

My advice is that once you’ve identified the long term trend, don’t go against it.

Fibonacci Retracement in Forex – Pullback Entries

If we were to divide the types of trades into 4 categories, they would be breakout, pullback, counter trend and range trades. Breakout traders enter on a worse price, they’d rather wait for a price confirmation for more assurance. Counter trend traders go against the herd, hoping for a quick pullback to make quick profits, while the main trend makes a pullback. Range traders go back and forth between the identified ranges and do not trade outside of it, when a trend happens.

pullback to the 61.8 level

Fibonaccis are for pullback traders, who wish to enter the markets on a discount, i.e a better price. They’ve identified a level in which they’d be interested to enter, in hopes that the trend will continue. Pullback traders get hurt at the end of the trend, when it falls into a range or turn a different direction. If they’re good enough, they may still get out of a smaller loss or breakeven.

Forex Fibonacci Extension

The other benefit about fibs is using it to measure our exit target/ TP. By pulling the fibs on the corrective wave or the BC leg (in ABCD pattern), we can measure where price is likely headed to. For me personally, the 161.8% level has been pretty accurate and if you’re still uncertain of where you can place your TP, you may use the fib exetension. At times when the trend is really strong, we can even reach the 261.8% level, but usually not before a period of range, after the 161.8% level has been hit. Again, use fibs with a slight discretion and keep in mind that the lines should be regarded as zones, rather than just a line.

measuring take profit areas and price projection

If you prefer using the ABCD pattern to measure the target, that would work as well. Whether you’re using the fibs or the pattern, these are simply just tools to measure the projection of price. As long as you’re making trades that can yield a bigger reward to risk ratio, you’ll be fine in the long run.

Read more about the Parabolic SAR EA here

Read more about the Trendline Break EA here

How The Fibonacci EA Works

FJ Fibonacci Entry EA settings

  • Change the name of your fibonacci to just “Fibo”.
  • Enter the desired mode – Choose BUY or SELL. The EA can only be in 1 mode at a time. For buys it will enter on price dips and for sells it will look for rallies.
  • SL – Placed below or above the high or low of the lastXBars
  • TP – A multiple of the distance between the entry and stoploss distance. An easy way to measure risk to reward.
  • MagicNB – There can only be one open trade with the same magicNB. If you choose to add the fibo EA to a second chart, be sure to use a different number.

Slippage, SL padding and the Last Stop loss bars are recommended to left at its default settings.

Drawing the fibs is pretty straighforward, you can watch the video below for an easier demonstration and also more details on how to use the EA.

Video:

 

The Trigger: Fibonacci Forex Trading Strategy

Depending on the level of retracement you choose, for buys, we wait for a candle close below it and the next candle to close above the line. For sells, we wait for a candle close above the specified pullnback level, and the next candle to close below the level. We don’t just enter based on the wicks or highs and lows of the candles, they need to close beyond the line for the EA to consider it to be valid. Once the trigger is met, we would enter immediately at the candle open. I have created this trigger to filter out the noises and spikes in the market, so that the signals are more accurate and fewer will be created. Yes this would mean that we would miss out on some trades, but I’d rather trade less and take quality setups.

Fibonacci Forex Trading

It’s a semi-automated EA meant to aid traders in the execution aspect of trading. It does all the calculations in finding the optimal lot size, based on the risk, finds its stoploss and sets the tp as well. You as a trader still have to decide and pick a direction, up or down, and look for areas for entries that can yield positive reward to risk trades. In the long run, that’s how we stay in the game as traders, by guessing the right direction more often and winning more on the winning trades.

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