The Fibonacci day trading strategy is a popular method of trading the forex market. Fibonacci levels are percentage values that traders use to forecast the length of corrections in a trending market. Traders use Fibonacci retracement levels as potential levels of support and resistance while Fibonacci extension levels are used as profit taking levels.
Most forex trading platforms have Fibonacci tool in-built in them; therefore, you will not need to manually calculate the ratios and percentages before starting to use the strategy. Once you’ve plotted the tool on your charts, you can start using it for identifying potential trade opportunities.
The most popular Fibonacci levels are 38.2%, 50%, and 61.8%. In a strong trending market, prices of currency pairs usually tend to retrace a minimum of 38.2%. And, in a weaker trending market, trend corrections may move to as far as 61.8%. The 50% is the most widely used retracement level and it tends to be a good area for entering long positions in the up trends or entering short positions in the downtrends.
If a correction goes beyond one of the retracement levels, then wait for it to go to the next level before placing a trade. For example, correction may go to 50% after the 38.2% level or to 61.8% after the 50%. In most cases, when currency prices retrace by over 61.8% of the previous move (on a closing basis), then it is possible that they will retreat all the way to the start of the trend.
In addition, since they are used as potential support and resistance levels, you can employ Fibonacci retracement levels to add to your existing position or to initiate new trades- in keeping with the principal trend. If the price of a currency pair is in the overbought territory or oversold territory, then you can expect a correction to develop. And, it is most likely that this correction will halt at one of the Fibonacci retracement levels; therefore, this gives you a good opportunity of identifying profitable trading opportunities.
It is important to note that if other technical analysis tools back up the existence of support or resistance at some Fibonacci retracement levels, then this provides you with a good low risk/high risk trading opportunity. For example, if retracement levels occur at reversal candlestick patterns, then this increases the probability of profiting from a trading opportunity. You can also use other tools to substantiate the validity of Fibonacci support or resistance levels.