This forex strategy focuses on the idea to open buy and sell trades on Fibonacci support levels and resistance levels, better known as buy on dips when the market is in an uptrend, or sell on rallies when the market is trending down.
Ideally, fx traders look to enter trades at or near the 38.2% retracement level.
Why? In strong trends, the expectation is that if a pair retraces from its recent high or low price, it will find support or resistance at the 38.2% Fibonacci retracement level.
Traders typically look to buy or sell again at this level.
Don’t worry, you don’t need to calculate this level yourself, our Fibonacci indicator will do this automatically for you.
Here’s how the strategy works:
Used Metatrader 4 indicators: ifibonacci.mq4, RSIFilter.mq4
Preferred time frame(s): any
Recommended trading sessions: any
Currency pairs: any
Example: USD/JPY 4 Hour Chart (Click the image for full size)
As you can see from the USD/JPY 4 hour chart, the trend is clearly up. The swing high price is 121.69 and swing low price 115.98. Price pulled back from the swing high and found support near the 38.2% retracement level.
Important: The USD/JPY didn’t close below this level. Buying at or around this retracement level would have been a profitable buy trade!
Here’s how you should trade it:
Buy trade conditions (see chart):
- RSIFilter indicator is orange (trend confirmed up)
- Price pulls back towards the 38.2% retracement level but the candlestick doesn’t close below this level (see chart)
==> Open a buy trade 3 pips above the high of the candlestick (LE) and place a protective stop 1 pip below the 50.0% retracement level.
Take profit method: Close the trade 5 pips below the swing high price (before it hits resistance). Alternatively, close the trade for positive risk:reward ratio such as 40 pip stop and 80 pip target.
Sell trade conditions:
- RSIFilter indicator is blue (trend confirmed down)
- Price rises back towards the 38.2% retracement level but the candlestick doesn’t close above this level
==> Open a sell trade 3 pips below the low of the candlestick and place a protective stop 1 pip above the 50.0% retracement level.
Take profit method: Close the trade 5 pips above the swing low price (before it hits support). Alternatively, close the trade for positive risk:reward ratio such as 50 pip stop and 100 pip target.