Fibonacci

USING

FIBONACCI IN FOREX 

Table of Contents PART 0: An introduction .......................................................................................................................... 2 PART 1: Fibonacci sequence levels .......................................................................................................... 3 PART 2 Fibonacci retracement levels ...................................................................................................... 4 Presence of a trend ............................................................................................................................. 5 Golden Phi ........................................................................................................................................... 6 PART 3: Fibonacci target levels ............................................................................................................... 6 PART 4: How to place the Fibonacci tool ................................................................................................ 7 PART 5: How to trade with the Fibs ........................................................................................................ 9 Entering a trade ................................................................................................................................... 9 Exiting a trade.................................................................................................................................... 11 Waiting for triggers ........................................................................................................................... 12 Filtering out setups............................................................................................................................ 12 PART 6: Trading with confluence .......................................................................................................... 12 PART 7: Difficulties with Fib trading ...................................................................................................... 14 PART 8: Summary .................................................................................................................................. 15

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Hello Forex trader, My name is Nenad Kerkez –  also known as Tarantula FX – 

–  and I am a professional Forex trader. I also teach Forex trading via my own platform Elite Currensea.

www.elitecurrensea.com.

PART 0: An introduction I am a well known trader in the Forex industry due my various webinars & analysis at:

Forex Factory: ranked 6th out of 300,000+ members + one of the most read threads ever FXStreet: analyst and webinar speaker Admiral markets: blog writer, analyst and webinar speaker Investing.com: blog writer th

Image 1. Nenad listed as 6  on Forex Factory website with 324,483 members (June 2015)

So perhaps we know each other from one of these occasions… You have taken the very important first step by investing your valuable time into learning the fundamentals about trading psychology. BUT this effort is worthless if you do not make a commitment to FULLY read and learn this eBook from top to bottom…

We live in a world where is information is everywhere. In fact information is OVERLOADING us on a daily basis but KNOWLEDGE is missing. People have become accustomed to a constant stream of new information and are no longer capable of focusing on 1 theme for very long before getting bored. They can no longer FOCUS.

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Do not make this MISTAKE here: focus and learn intensively this trading psychology document. This e-book will show you an explanation of Fibonacci and Fib trading in the Forex market. This tool offers an excellent trading method and I am sure that you will discover this soon. But do realize that you need proper training, knowledge and practical experience before you get the most out of Fibonacci in the world of Forex trading. I will start with the basics and then move gradually to more demanding topics. Enjoy!

PART 1: Fibonacci sequence levels Fibonacci was in fact a real person, who lived by the name of Leonardo Bonacci. He was born in Pisa around 1170 as the son of a wealthy merchant. Fibonacci was an Italian mathematician, who was considered "the most talented western mathematician of the Middle Ages .” In 1202, when he was 32, he published his book Liber Abaci (Book of Calculation), where he presented the Hindu-Arabic numeral system . He is also known for the Fibonacci number sequence, which was actually not discovered by himself but named after him. The Fibonacci sequence numbers are:

0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987, 1597, and so on to infinity. This line series is created very simply by adding the last two numbers together:

0 +1 = 1 + 1 = 2 + 1 = 3 + 2 = 5 etc. The method stays the same for higher numbers as well such as: 89+144 = 233, and then 144 + 233 = 377, etc. These numbers are used in trading stocks, commodities and on the Forex market. In fact, you can also observe Fibonacci around you: 

In crystal formations;



Played out in musical progressions;

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In the growth of rabbit populations;

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Even in the DNA spiral;



Whole human body itself is full of Fibonacci relationships.

Fibonacci ratios are simply everywhere! For my own personal Forex trading Fibonacci is o ne of the most powerful tools available. I keep my chart simple and clean but Fibonacci is often on my chart. Fibs are very handy because they can provide a lot of information from support and resistance levels to potential entry levels, from potential target levels to stop loss levels. All that information is provided in one simple tool so everyone likes Fibonacci.

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PART 2 Fibonacci retracement levels The Fibonacci ratios are calculated by dividing the Fibonacci sequence numbers in various ways: If we divided 13 by 21 for example, we get 0.619 While 21 divided by 13 = 1.615. If we skip a number and divide 8 by 21 we get .381. Conversely, 21 divided by 8 is 2.625.    

One interesting aspect is that it doesn't matter where we start. We can take any two numbers, like 5 and 100. Soon we're dealing with the same series  – we are getting the same ratios: 5, 100, 105, 205, 310, 515, 825, 1340, 2165. 1340 divided by 2165 = 0.6189 2165 divided by 1340 = 1.616 The Fibonacci retracement levels are also calculated by dividing the Fibonacci sequence numbers. 34/21 = 1.618 (bigger number is divided by smaller next but one number) 8/13 = 0.618 (smaller number is divided by bigger number next to it) 34/89 = 0.382 (smaller number is divided by bigger number 2 next to it) There are other Fib levels as well. Here is the full list which will be needed for our purposes: 1) The 23.6% or 0.236

 i.e.

13/55 = 0.236

2) The 38.2% or 0.382

 i.e.

13/34 = 0.382

3) The 50.0% or 0.500

 not a Fib number but a half way ma rk

4) The 61.8% or 0.618

 i.e.

5) The 78.6% or 0.786

 square root of 0.618

6) The 88.6% or 0.886

 square root of 0.786

7) The 100% or 1.000

 double bottom in uptrend or double top in down trend

8) The 138.2% or 1.382

 bottom or top has been broken & price goes 38.2% passed it

9) The 161.8% or 1.618

 bottom or top has been broken & price goes 61.8% passed it

13/21 = 0.618

The 23.6% and 38.2% are shallow Fib levels, the 50% and 61.8% are intermediate or medium Fib levels, and the 78.6% and 88.6% Fib levels are known as deep Fib levels. Why are these levels useful? Fibs are a great method for measuring the market psychology. Simply put, w ho wouldn’t want to get a 50% discount?! Imagine yourself in a store and all of a sudden the sales person says : “All of our goods have 50% discount!” Guess what that does with the psychology? Yes, big discounts are great to keep the costs low. The same principle can be used in the world of Forex trading. In the example below there is a trend which stalls and retraces back to 50% market. Traders are going to use this chance, just like shoppers do.

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Image 2. An example of a Fibonacci on the chart.

Presence of a trend The example above is very important because Fibonacci levels work best in trend markets. They do NOT work well in consolidations, corrections, ranges and sideways moves, because the Fib levels are mostly ignored and price is more responsive to different levels such as tops and bottoms. If the currency pair, however, is indeed trending then the tool is a great asset! The Fib levels then provide a precise indication where there is a high chance that the market could turn back in t he direction of the trend.

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Golden Phi The Golden Phi has had many names, among others the Golden ratio. It is the 61.8% Fibonacci retracement level that is extra special. Kelper called it “one of the jewels of geometry“, Pacioli named it the “divine proportion“, and finally Greeks used for it the letter “phi“. The Phi is a crucial element in Forex Trading. Two quantities are in the golden ratio if : the ratio of the sum of the quantities to the larger quantity is equal to the ratio of the larger quantity to the smaller one. In math this means ((A+B)/A) = PHI. The PHI is equal to 0.618. That is why the 61.8 or 61.8% Fib retracement level is so important in Forex trading. Golden Phi is just a tad more important than the other numbers in Forex trading.

PART 3: Fibonacci target levels The Fibonacci levels are also important in other ways. Besides the retracement levels they also provide information about TARGETS! That is the unique part of Fibonacci: they provide both entries and exits. There are 2 main targets you want to add to your Fibonacci retracement tool: 

-0.272 / -27.2%



-0.618 / -61.8%

These targets are GOLDEN! No I am not exaggerating. Figure showing 2 Fibonacci tools. Image 3. A chart example of price going from Fibonacci retracement to target.

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They are precise and reliable targets, and you will never have doubts where to take profit. The reasons are simple: the market respects these Fibonacci levels AND the market behaves in repetitive patterns. That means that the targets will keep working in the future as well. Other targets of importance are: 

-1.618



-2.618



-1.000



-2.000



-0.786



-4.236

You can add these targets by placing the Fibonacci tool on t he chart, double clicking on the tool, then (right) clicking on it, click on properties, click add, and then adding these levels to your Fibonacci retracement tool. The level should be -0.618 on the left and either -0.618 or -61.8 on the right. IMPORTANT: Don’t forget to put there minus sign.

PART 4: How to place the Fibonacci tool The most important thing is to place the Fibonacci retracement tool correctly. That means to use the proper top and the correct bottom. If you do this wrong then you wi ll trade the wrong leg of a move and get stopped out for a loss. There are 2 basic things that should be clear. Image 4. How to place the Fibonacci tool on price.

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First of all, you should realize that the tool is placed tool from left to right so keep it in mind when you will read the next parts of this eBook. Second important thing is to place the Fib on the correct place, which i s from the bottom to top in an uptrend and from top to bottom in a down trend. This is called a “swing high swing low”. Here below is an example of a downtrend where the Fib is placed from the top to the bottom and the price retraces back to the 50/61.8% before continuing down again. On the figure 5 below you can see Fib levels from A (100 %) till B (0%). Fibs are always placed from lowest swing low (left A) to highest swing high (left B) in uptrend and from highest swing high (right A) to lowest swing low (right B) if we want to trade downtrend. Left picture - uptrend:

Right picture – downtrend:

A – swing low

A – swing high

B – swing high

B – swing low

C – retracement level

C – retracement level

D –potential target

D –potential target

Image 5. Two examples of a swing high and swing low. On the left a bullish example and on the right a bearish one.

How do you know it’s time to place Fib?

It is important to realize that a new Fib is preferably not placed on a new swing high swing low unless the target has been hit. The reason why is simple: only when the targets have been hit is the currency pair in fact confirming a trending mode. If the currency bounces in between the top and bottom then in fact the currency is in a range and Forex traders only want to place a new Fib once the trend is back in fo rce. The most important target is the -0.618. The exception is in case of the 78.6 % and 88.6% Fibonacci retracement levels because they mainly target the -0.272 target. All other 4 Fibonacci levels (23.6, 38.2, 50.0, 61.8%) mainly aim for the -0.618 target. In image 6 there is an example that shows how price hits the -0.618 target of the first Fib (green color). Only then is the Fibonacci tool placed again from retracement to target (blue circles) which is indicated by the pink Fibonacci.

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Image 6. How to move the Fibonacci tool after the target is hit. The first Fibonacci is green, the second one is pink.

We have introduced the name, principles of calculating the Fibonacci ratios and now we have to explain how to place the Fibonacci tool. One part of the story is having the knowledge, but actually implementing it is a different matter.

PART 5: How to trade with the Fibs Fibonacci is used by traders to help with: 1) Entering a trade 2) Exiting a trade 3) Waiting for triggers 4) Filtering out setups

Entering a trade A trader can place the Fibonacci tool on a swing high and swing low with a decent momentum. Don’t forget that traders want to see the presence of a trend as well.

Any of the Fibonacci retracement levels could be an entry spot. The main levels, once again, are: 23.6% and 38.2% (shallow), 50% and 61.8% (medium), 78.6% and 88.6% (deep) Fibonacci levels. Not all of these Fibonacci levels will be used. Sometimes price stops at the 23.6%, at other times it will be the 61.8% Fib. In fact, price could potentially stop at any of the 6 Fib levels, or not all and cause a loss. It sometimes stops at each Fib level but continues to retest the other deeper Fib levels as well (see image 7).

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Image 7. Example of how price respects Fibonacci levels.

In general the shallower the Fibonacci level the more often it is used by the market. A rough indication is that price reaches the 38.2% Fibonacci retracement level in about 75% of the time, but the 78.6% Fibonacci levels only 33% of the time. This is logical because each of the Fib levels could be the bouncing spot which means that each deeper Fib is used less frequently. Although the shallower Fibs are used more often, their distinct disadvantage is the fact that: a) Either the stop loss is larger when placed below bottom or above top OR b) The stop loss is placed closer to the Fib but then it is in danger of being hit too early as the price retraces deeper The shallow Fib levels are therefore difficult to trade with pending orders and are better approached by waiting for: 1) Candle stick confirmations 2) Breakouts The medium Fibonacci levels (50% and 61.8%) are better suited for pending orders. These Fibs offer a smaller stop loss size plus there is less risk that price could retrace deeper. The deeper Fibonacci levels (78.6% and 88.6%) have a very small stop loss but run a higher risk that the trade could turn into a loss. Which Fibonacci level is more used depends from case to case. There are methods that help with identifying the most likely Fib. One of them is Elliott Wave Theory and the other is finding confluence

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on the chart. Confluence will be discussed in a separate section but the wave analysis helps in the following ways. Fibonacci levels go hand in hand with the Waves: 

Wave 2’s usually have a deep retracement;



Wave 4’s usually have a shallow retracement;



A wave B in a fast correction (zigzag) is often 38.2% / 50% / 61.8% retracement;



A wave B in a slow choppy correction is often a 78 .6% / 88.6% / double top or break of the top till 138.0%.

Last but not least, Fibonacci traders can use the targets as well for potential entries as a reversal setup. Let us assume that price has reached the -61.8% Fibonacci target. This often creates a pullback or sometimes even a reversal. A trader can attempt to enter a trade into the opposite direction as they are anticipating the temporary or a long lasting change of direction.

Exiting a trade The ideal exit depends on the market structure, the wave count and t he deepness of the retracement. Let us discuss the connection between target and retracement first of all. 1) The shallow and medium Fibonacci levels are aiming for the -61.8% Fibonacci target. 2) The deeper Fibonacci levels are aiming for the -27.2% Fibonacci target. The shallow and medium Fibonacci levels will tend to ‘respect’ the -27.2% Fibonacci target but in some cases price continues to the higher target (see image 8). The respect could be visible in various ways such as a deep pullback, shallow pullback or sideways move but not all the way back to a lower Fib of the original swing high, swing low. Image 8. Price reaches -61.8% Fibonacci target after deep retracement (pink Fib and blue circle).

In certain cases price fails to reach the -27.2% and -61.8% Fibonacci targets and makes a double top or bottom OR price in fact accelerates past these targets to go even further (see red circles in image 8).

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Failure to reach target: obviously at one point or another, the trend will have to stop and this is the time when price fails to reach the target. Also if you use the Fibonacci tool against the bigger trend then there is a risk as well that the target will not get hit. So if you use Fib levels either at the end of the trend or against the trend, then there is real risk that target will not be hit. How the end of the trend is calculated or how the trend itself is defined are again different topics which unfortunately beyond the scope of this document. Continuation past target: price can also on occasion accelerate to better targets. This often occurs at the beginning and in the middle section of the trend.

Waiting for triggers Waiting for a trigger means that a trader is interested in trading it from a Fibonacci retracement level or from a Fibonacci target (reversal) but they prefer not taking the trade with a pending order. Instead of entering the trade right at the Fibonacci level, the trader waits for a confirmation (which is called a trigger). A trigger could be a candle stick pattern at the Fibonacci level, which confirms that price is indeed stopping at the desired Fib level. Traders can trade Fibs in combination with candle stick pattern, break outs or any other confirmation that price is respecting the Fib level.

Filtering out setups Fibonacci numbers can be also used to filter trade ideas because Fibonacci levels are essential in identifying potential support and resistance levels. Big Fibonacci levels tend to be well respected so nobody wants to enter the market in front of a big Fib level which is either a major support or resistance level. Most often these key Fibonacci levels are seen on a higher time frame. When a big Fib is indeed nearby then traders have to revise their trading decisions and filter out (skip) the trade. For instance in the image on the previous page a trader should go long right in front of the -61.8% Fibonacci target as the market will most likely retrace OR reverse from there (as we can see on the chart, price actually reversed tot the downside).

PART 6: Trading with confluence The best tip when trading Fibonacci is: f ind confluence! Confluence means finding multiple reasons for taking a trade. 1) That could be for example a Fibonacci retracement and a Fibonacci target at the same level. When a Fib target and a Fib retracement line up at the same price, then the likelihood of price reacting to it has substantially increased. 2) Another method for confluence is using price action at important Fib levels. Waiting for a confirmation of price reaction to a Fib level reduces risk and ensures that the Fib placement is correct. 3) Key levels such as day and week support and resistance levels, pivot points, ro und numbers, historical levels, etc can be used to increase confluence as well.

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4) Last but not least, moving averages and trend lines also work well in combination with the Fibonacci levels. Trend lines are used as visual representation of support and resistance in any given time frame. They are usually drawn over swing highs in downtrend or under swing lows in uptrend to show the prevailing direction of price. If you are drawing trend lines you need to have at least 2 t ouches to get the valid trend line. The more touches you have the more valid trend line becomes, although be careful that a trend line break eventually will occur. We can recognize three types of trend lines: Image 9. Various types of trend lines: inner, outer, long term.

Inner trend line – represents the short-term movement of price Outer trend line – represents the medium-term movement of price Long term trend line  – represents the long-term movement of price Another method of finding confluence on the chart is by applying the Fibonacci tool on various time frames. A trader can establish which levels have more Fib levels g rouped together. This has the following impact: the more Fib levels, the stronger the confluence, and the strong the support or resistance is on average. Look for 2 fib confluences  – major and minor swing. Major swing has to be always found in last 7-8 days while minor swing represents the last swing high or low intraday swing. If we cannot find 2 swings which is very rare, than we use just one, usually minor swing. In the figure below there are two good confluence points. The 23.6% which is a very shallow level but it does provide confluence with the smaller 61.8% Fib. We can see another confluence point at level 38.2% with the 100.0% and even between the 61.8% and 161.8% levels.

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Image 10. Two Fibonacci tools on the chart: one big Fib and one small Fib.

PART 7: Difficulties with Fib trading Many traders think that Fibonacci trading can only be conducting on higher time frames like a daily chart. This is not true. The Fibonacci tool can in fact be used on all normal time frames like an hour chart, 4 hour and daily. But it is even usable on 5 minute, 15 minute or 30 minute charts. Personally I do not use it for 1 minute charts. Obviously it is true that the Fibonacci retracement tool has more significance when used on a higher time frame, such as daily chart, simply because more market participants are involved. However on a smaller time frame it is easier for a trader to use the Fib as a pullback for an actual entry, whereas on a higher time frame the Fib has more importance as trigger or filter. The most difficult part of trading with Fibs is using the correct swing high swing low. If you are Fibbing the wrong leg then ultimately there is a higher chance of getting stopped out. It is always important to use natural tops and bottoms to place your fib.

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There are many ways to improve the placement of Fibs but the best one is when you wait for the target to get hit. The rule states that traders must wait for the Fib targets to be hit before placing a new Fib. If the currency doesn’t hit the target, wait with Fibbing a new leg, because the currency

could be ranging. Image 11. Price reaches -61.8% Fibonacci target after deep retracement (blue circle).

PART 8: Summary Thank you for reading this eBook! I truly hope that this guide helps you evolve as a trader. Please write us at [email protected] with your ideas, suggestions, progress, and comments! Join our courses including strategies, hours and hours of video with golden material, live and personal Skype call if you are interested in taking your Forex trading to the next level. Do not miss out on a successful trading career. Do not miss your chance to make pips today! There are basically 2 options.

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Thank you for your attention and hope to see you soon. Wish you many green pips,

Nenad Kerkez, pro Forex trader Nickname: Tarantula FX Forex educator at Elitecurrensea.com http://www.elitecurrensea.com/

Web: EliteCurrensea.com Email: [email protected] Twitter: @elitecurrensea.com Ps. if you are skipping parts of the text, I recommend reading all of it. I believe that this eBook is very special so I would like to ask for your f ull and focused ATTENTION.

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