Frequently Asked Questions about Fibonacci

Frequently Asked Questions about Fibonacci

Now that we showed you how to pick entries using Fibonacci, let's discuss how to pick smart entries with Fibonacci method and also how to increase your trading success with this great tool.

Let's answer some frequently asked questions:
How accurate is Fibonacci study, does it always work?
Don't be surprised to hear that when used alone, Fibonacci study will be somewhere around 50% accurate. Yes, that's right. If you use only Fibonacci to predict market direction and set your entry, you could be very soon disappointed with overall Fibonacci performance. However, when used in combination with other technical indicators or studies — Fibonacci becomes up to 96% accurate! That's the probability we want you to trade!

So, when do traders use Fibonacci tool? Only when they already know what the market is up to: rising or falling. If it is unclear — they stay out. This means that you shouldn't use Fibonacci to guess on market direction, you should use Fibonacci to confirm your already formed views.
How do traders find what the price "has in mind"? They use additional technical indicators and studies, such as, for example, moving averages, trend lines, Pivot points, chart patterns analysis etc.
When traders can finally tell the direction of the price, only then they set up Fibonacci and look for confirmation and good entry points.
To help you begin your research of useful confirmation tools try setting up RSI (14) on a daily chart. Even if you trade 1 hour chart, RSI should be daily. Watch, if indicator shows below 50, then you can follow Fibonacci signals on 1 hour chart to go short, if above — only long. It won't be an absolute solution to all situations, but can bring Fibonacci effectiveness to a new more successful level.
What is the best time frame to use Fibonacci on?
The beauty of Fibonacci method is that you can use it on any time frame. It will work precisely on daily charts, hourly charts and on smaller ones, even 5 and 1 minute! However, the larger the time frame the more accurate results traders can expect.
Traders should always keep an eye on daily Fibonacci — Set and Forget mode.
For intraday trading we would recommend using 3-4 hours or at least 1 hour charts. Going smaller will increase the risks as well as decrease profit expectations.
After calculating risk/reward ratio some entries, stops and profit targets according to Fibonacci rules can be a concerning factor. How to manage this situation?

There are a couple of things traders can do to ensure their risks and rewards are within the money management rules:

1. Entering only on 0.618 retracement — the safest, minimum risk level.

2. Setting a stop loss slightly below (for uptrend) / above (for downtrend) 0.618 retracement — which means that if the price has violated this level and moved further — there will probably be no Fibonacci setup and it is time to exit.
Here traders could choose: exiting with smaller loss and possibly later watching the price reversing and going in their favor, or waiting to collect bigger loss as the price reaches point A of AB swing, but hopefully there will be reverse before this happen...

3. Taking profits slightly before the price comes close to B point (after the retracement) — it will be a 100% level point if to calculate Fibonacci levels. It is the safest "play" — collecting profits before B point. Then, if traders decide to continue trading, they can place another entry when the price manages to pass through that 100% line (pass point B of AB swing). In such way traders could avoid the dangerous zone at B swing where the price, if it is going to be a change in the trend, will reverse and form double-bottom pattern and move against them.
4. Running two orders. Traders may try opening two orders at 0.618 retracement level. Close the first order at the 100% mark (B point), the second — let it run to 0.618 extension and bring a stop loss higher with each progress made. This way traders will collect some sure gains with the first order and if the price continues moving in their favor — they have a potential to benefit even more. However, with such approach traders are also doubling their risks and will colect additional loss if the price moves against them. In such cases when running 2 orders we would suggest exiting at least with one order at the violation of 0.618 retracement and if tolerated wait for price passing A swing to close the second order.

5. And finally: traders should make some statistics about different currencies they've tried, note which one obeys Fibonacci levels best and gives higher chances for profiting. Observant traders will notice that for a particular time frame some currencies may often ignore Fibonacci while other perform very well. This way traders can eliminate additional risks.

Next logical question:
Which currency pairs don't normally follow Fibonacci and which do?
As we mentioned, some pairs aren't very "friendly" to Fibonacci sequence. The only suggestion here would be to avoid trading such pairs. Sometimes it is temporary...
From our observation, USD/CHF is the least obedient pair. Then, unfortunately, EUR/USD has a lot of surprises for Fibonacci traders: Again, this is our point of view.
The most accurate is GBP/JPY and also all other pairs with JPY. Yen is a steady trend-following currency and Fibonacci rules there work perfectly.

You can also do some tests using historical data. Simply scroll the chart back and set Fibonacci on each wave you are able to find for a chosen currency pair. You will see the results for yourself.

Is there any suggestion for Fibonacci trading when the market moves sideways?
First of all, when the market is trading sideways there is a very little chance to get rewarded, but there is a huge chance to sustain additional losses. Therefore, no Fibonacci should be applied in sideways market.
Instead, traders should draw two trend lines above and below the price trading range (trend lines will show support and resistance levels) and then place orders when the price breaks out of this levels. That is the only way to trade sideways moving market.
If Forex traders are determined to find a trend, they should switch to a larger time frame.
I still have troubles finding Swings High and Low (A and B points) to draw Fibonacci on...
If you take a group of traders and give them the same chart to define Fibonacci levels you will discover that there are many opinions on where exactly to place Fibonacci study.
Our goal is to find the approach that would be used by majority of Forex traders. This skill comes only with practice.
However, to help you now in your first efforts to define AB swings, lets use couple of tricks, or rather eye guiding tools.
Tool number one will be Stochastic indicator — set full or slow Stochastic with settings 5, 3, 3 or 14, 3, 3, whichever works best for you and use Stochastic lines crossover to find tops and bottoms. E.g. when Stochastic lines cross, mark this point on a bar chart, around this level we will have our Swing High or Swing Low.
Tool number two is Heikin-Ashi candlesticks. Simply switch your charts to display Heikin-ashi bars instead of regular candlesticks. If you don't have such option on your Forex trading platform, use another one from a different broker, for example, Oanda or FXSolutions.
With Heikin-ashi charts price waves become more apparent. Once Heikin-ashi candle changes its color to the opposite (wait till the candle is closed) mark your new level high or low. Once got High and Low pull Fibonacci study with confidence.