FREE FOREX STRATEGIES
Forex brokers comparison

Advanced system #2 (Fibonacci Trading)

The fact that Fibonacci numbers have found their way to Forex trading is hard to deny.
Moreover, trading currencies with Fibonacci tool for many traders have become the bread and butter of their whole trading career.

So, shall we look at the one of such good Forex trading systems today?

Trading setup and tools we need:
Time frame: 3 hour (or 4 hour).
Currency pairs: any.
Indicators:
Fibonacci tool - our main tool
EMA 100 – green (visual guidance)
SMA 150 – red (visual guidance)
RSI (14) on a daily chart

We will be working with next Fibonacci retracement levels: 0.382, 0.618, 0.250 and 0.750.
Default stop loss – roughly 100 pips and then adjusted according to the most recent swing high/low.
Profit target – no target is set as we will let the profits run.

Trading Rules:
Find the closest to the current price wave with a distance from High to Low over 100 pips.
Apply Fibonacci on it no matter if the wave is going up or down, only size matters.

Some terms we are going to use here:
The corridor between 0.382 Fibonacci retracement level and 0.618 retracement on the chart – will be called a “must channel”.
Fibonacci retracement levels will be numbered always from bottom to top, no matter whether it is an up or a down wave. E.g. at the bottom we will always have 0.250, then next 0.382, 0.618 and finally on top – 0.750 Fibonacci retracement level.

Entry rules:
Always enter only according with both:
1. EMA and SMA trend suggestion (e.g. green on top – uptrend, red on top - downtrend)
2. RSI suggestion (e.g. reading below 50 – only sell orders, above – only buy orders).

Now, after applying Fibonacci on a wave bigger than 100 pips we wait for the price to go inside a “must channel” area (at least to make 1 pip into the channel). Only then next rules will be valid:
- If a full candle (including shadows) is closed below 0.250 Fibonacci retracement, we go short. If we are currently long – it is time to close long position – it is an exit rule as well.
- If a full candle (including shadows) is closed above 0.750 Fibonacci retracement, we go long. If till this time we had short positions open – we close them – and again it is an exit rule as well.

Important: once another wave greater than 100 pips occur, set a new Fibonacci on the new wave. Retracement levels will change and so we will now follow new retracements.
(Optional: for visual aid traders may mark old Fibonacci wave to see the general pattern of consecutive waves on the chart).


FOREX TRADING SYSTEM



That’s it. Stay in trade, resetting Fibonacci with each new wave and moving a stop loss according to the last swings high or low (in simple words, a stop loss will be always just below the Fibonacci 0% line) until it is time to close the position according to our rules.

This strategy prevents a lot of “bad” entries, eliminates early exits and allows staying in trade for a long period of time helping to take everything a current move can offer.
Traders may close all good winning positions on Friday evening if they prefer not to hold them over a weekend.

To your trading success!

Edward Revy,
http://forex-strategies-revealed.com/

Copyright © Forex Strategies Revealed

HI EDWARD!
I DO HAVE A QUESTION PLEASE.
REGARDING THE 'MUST CHANNEL' THE NEW WAVE IS STILL GOING UPWARD.
DO I HAVE TO WAIT FOR THE PRICE TO GO INSIDE THE 61% AT LEAST 1 PIP BEFORE BUYING?

Yes, you have to wait. Fibonacci based entries are always made on retracements. If you jump on the wave that has not retraced yet, there is a big chance that you will become a witness of an upcoming retracement, which is not pleasant when you have already opened a trade...

SO, IN ANOTHER WORD..WHEN THE NEW WAVE IS DOWNWARD WE HAVE TO WAIT UNTIL IT GOES UP TO 38% AT LEAST ONE PIP THEN WE PUT IN THE SELL OREDER..AM I CORRECT.
THANKS IN ADVANCE AND HAVE A NICE JULY THE FOURTH HOLIDAY,
TOMMY

That's right. If you are looking to sell in a downtrend wave, you look for the price to retrace upwards and make at least 1 pip in above 38%. This validates the retracement and so you can enter once the full candle closes below 25%. Thank you, Tommy. Same nice holidays to you and all other users.
Edward.

Hi!

I have a question.

If you draw a fibonacci line and then the actual retracement is more than 100 pips, is it appropriate to redraw the fibonacci lines on the retracement itself and then look for the must channel qualification or do you stick with the original fibonacci lines before the retracement and wait for the first full candle above 75 or below 25?

Thanks in advance,

Mark

Hi Mark,
Thank you for your question.
If the actual retracement is more than 100 pips, you've got a new valid wave, therefore you should definitely draw a new Fibonacci on that retracement and abandon previous Fibonacci lines. You then look at your new Fibonacci and use the same old rules: if it goes above 0.750 - you enter Long, below 0.250 - you go Short.

Setting new Fibonacci lines on retracement of course makes sense only if the old Fibonacci levels 0.250 and 0.750 haven't been breached yet, e.g. the price still trades within those levels.

If so, there is one more trick to use, which suggests traders keep the old Fibonacci for a while.
It is used to recognize a true trend reversal from a large pullback.

Let's take the picture of GBP/USD we used above. The trend was up. Let's take current Fibonacci there and let's assume that the retracement we see there now is over 100 pips. It instructs us to draw a new Fibonacci on that retracement.

Now if the price on the new Fibs goes above 0.750 level - we can easily enter Long again/continue trading up. But if the price on the new Fibs goes below 0.250. There we start to suspect a possible trend reversal. This is were old Fibonacci lines can help. While aggressive traders can start selling immediately, more conservative traders would only close their current long positions and look at old Fibonacci lines. Once 0.250 line of the old Fibonacci gives up and the price closes below it - only then conservative traders begin Shorting as a trend change signal by that time will be looking much stronger.

Regards,
Edward.

Thanks Edward,
I am still unclear.
Once the price is inside the 'must channel' do we wait until a full candle closes at 250/750 and THEN retraces back inside the must channel before placing a trade? Or do we place it once the candle closes at 250/750-which would usually mean less profits because the price has already moved quite low or high already.

Thanks,
Beatrice

Hi Beatrice,
Action 1: waiting for the price to go in the "must channel". Once completed, go to action 2.
Action 2: waiting for a full candle to close outside 0.750 or 0.250 Fibonacci level.
Action 3: Enter.

Yes, you are right, usually by that time the price's already moved quite a bit. But that's the filtering option we want to use for our first entry. Once in the trade, with the next wave this strategy will help us to stay longer and prevent early exits.

If you, for example, decide to get in earlier by using common Fibonacci retracement levels (0.382, 0.50, 0.618), yes, you have a chance to start trading much earlier, but also you have a higher chance to lose if the price ignores Fibonacci levels for some reason.

One more idea to try out (which will guarantee an early entry but won't guarantee it to be always safe) is:
entering only at 61.8% Fibonacci retracement level with the stop at 75%.

All the best in your trading!
Edward.