Our preferred fibonacci strategy

Here you will find a guide on how to create a trading strategy based on Fibonacci ratios using our preferred method.

Components of this strategy

• How to trade effectively with our preferred strategy
• Examples of trades using our favorite method
• Our preferred fibonacci strategy is a dynamic trading approach that uses fibonacci ratios. 

We love it because:

• It works across various timeframes

• It is applicable to all major markets

• It is suitable for both bullish and bearish markets

• It provides many trading opportunities

However, for success, you need to find a market that shows a clear and strong trend. Ideally, these are markets that are reaching new historical, multi-year, or several-month highs or lows.

Timeframes

This strategy is most commonly used on 1-hour to 4-hour charts, although it can also be effective on daily charts or on shorter timeframes, such as under 15 minutes. In general, it is more effective on longer timeframes.

When planning an entry into a trade, however, it is often useful to also look at the 5-minute chart for a better assessment of the current market movement.

Components of the strategy

This strategy combines all the key elements of Fibonacci retracements and extensions. The foundation is to find a market that has made a significant move from point A to point B, and then retraced back to point C.

Next, you focus on trading a portion of the extension of the original move between points C and D, entering the trade when the market breaks through point B and reaches new highs or lows.
However, for our preferred strategy to work, strong momentum is required. This means that the correction between points B and C should be relatively shallow and fast. If the retracement to point C exceeds 50% of the AB move or if too much time passes between these points, the entry signal is no longer valid.

If these conditions are met, you can start planning your trade position at point C.

How to trade with our preferred fib

At point C, you decide on your entry, risk management, and setting goals for the trade.

Example of trading with our preferred fib

Entry Points 

As mentioned earlier, you will enter the trade when the market moves beyond point B and heads towards point D.

If the market is in an uptrend, you will want to buy a few points above point B.

If the market is in a downtrend, you will want to sell a few points below point B. You can enter this position using a stop entry order or a market order.

If you use a stop entry order, your position will open automatically when the market reaches that level.

However, if the market reverses direction, you will incur a loss.

Using a market order gives you some time to confirm that the breakout beyond point B is real. You can wait a few minutes before entering the position. However, in strongly trending markets, this caution may reduce your profits.

In this case, it may be wise to use a 5-minute or 10-minute chart to more accurately determine your entry. This way, you can wait until the price closes beyond point B before opening the trade.

Targets 

This strategy focuses on two key levels:

The first level is at 127.2% of the original move. At this point, you can move your stop-loss to eliminate the risk on the position.

The profit target is set at 161.8% extension of the BC move.

If the trend is particularly strong, you can set your profit target at 261.8% extension of the BC move. To assess the strength of the move, look at the size of the BC retracement. In a strong trend, the retracement should be around 38.2% or less.

TIP – Be cautious of any significant support or resistance levels before reaching your profit target. For example, if the market must overcome its 200-day moving average before reaching the 161.8% extension, this may not be the best time to enter the trade.

Risk management 

When you open your position, you will want to set a stop-loss order at a specific point on the opposite side of B. The exact placement will depend on your risk-to-reward ratio, considering where your profit target is.

Your risk-to-reward ratio should be greater than 1:1 – ideally 1:2 or higher.

You don’t have to wait for the market to return to your stop-loss level. If you enter a position beyond B, but then notice the market losing momentum, it might be a better idea to close the trade and minimize your losses earlier.

Examples of our preferred fib

Here are some examples of this strategy in practice. 

1.Buy NZD/AUD

OPEN

CLOSE

The position is opened at 0.80240, with a profit target at the 161.8% level, which is 0.80590. After moving the stop to break-even at 0.80383, the position is closed at the profit target.

2. Buy GBP/USD

OPEN

CLOSE

In this trade, which was opened ahead of a key economic release, the market moved significantly beyond the profit target. A short retracement could have been an indication that the 261.8% extension level would have been a better profit target.

3. Selling Gold

Open

CLOSE

In this example, the breakout above point B at 1793.51 quickly turned out to be a false signal. The stop-loss was triggered, which helped limit the losses on the position.