Swing trading strategies with Fibonacci tools

Introduction – about this guide

Welcome to Fibonacci trading guide.

Who is it for

This is a guide for people with some, even basic, trading experience. I show you how can you trade with Fibonacci, but you should have some knowledge about trading.

Of course, I understand that people have different backgrounds. Because of that, I try to explain strategies and trading with Fibonacci as good as I can.

You don’t have to be a daytrader. You can have a job and use Fibonacci as swing trading strategy on higher timeframes. That is one of the biggest misconceptions that you have to be in front of the screen all the time. I know traders who have great results and they trade on 4-hour or daily timeframe. Of course, if you want to trade on lower timeframes that’s fine. Fibonacci works on every timeframe. Simply don’t put pressure on yourself that you have to day trade to make money. I write about it later in the section about money management.

What will you learn

As the name states, you will learn how to trade with Fibonacci. People often use Fibonacci tool for the basic task (for example to open a trade at 61.8% retracement). There are so many different ways you can use Fibonacci tools. Especially joining Fibonacci with Pivot Points can give you great setups. This is my favorite strategy and I think you will love it.

I show you different ways you can trade with Fibonacci. In the end, it will be your task to select the strategies that work best for you.

How much money can you make by trading with these methods

It depends on your trading capital. Standard rules apply here so our goal is to follow risk management – that means we don’t want to risk more than 1-2% per trade.

Fibonacci is a great foundation for solid strategy. Focus on learning process, work on your setups. As I like to say, money follows those who work on their setups and risk management.

Chart setup

This is a quick tutorial on how to setup Fibonacci levels in Metatrader. In other charting software it should be similar. The most important part is to use levels that you can find at the end of this part.

Setup in Metatrader

Where can you find Fibonacci Retracement in MetaTrader4?

Go to the top bar and find Fibonacci Retracement icon:

Or you can go to the top menu and select Insert -> Fibonacci -> Retracement:

How to change Fibonacci retracement and extension levels?

When you have selected the Fibonacci tool described in point 1., draw it on a chart. Now, double click on the line that goes from 0 to 100%:

And click mouse right button. Next, select Fibo properties:

Fibonacci retracement and extension levels list

In Fibo properties, go to the second tab. You will find there a table with two columns: Level and Description:

Probably you will see some default values. You can edit fields and add new ones.

Setup in TradingView

You can setup the Fibonacci tool in TradingView platform. It can look like in the screen below. You can, of course, change colors to others.

The configuration of levels in TradingView:

Levels to use in your setup

Below you can find levels which you should use when you setup Fibonacci tool.

Level	Description
0	0.0
0.236	23.6
0.382	38.2
0.5	50.0
0.618	61.8
0.786	78.6
0.882	88.2
1	100
-0.27	127
-0.382	138.2
-0.618	161.8
-1	200

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Timeframes, market structure, different trading styles

Before we move to the Fibonacci tactics we have to talk about market structure, timeframes, and multi timeframe analysis. These topics are confusing for some traders. They are crucial if you want to be a successful trader.

Market structure

Before we learn more about the Fibonacci retracements, let’s focus on price behavior for a minute.

Let’s start from one tricky question and the basics of price behavior. In which direction can price move? You will probably answer: up and down. This answer is correct, there is a “but” though. What if there is no main trend? If there is no strong trend, the price will probably move sideways. Statistics say that the price is moving about 30% of the time in a trend and the rest of this time it is moving in a range. Why is moving in a range such a bad thing? It is because there is no clear direction and the price moves up and down, so it is very hard to make money in this kind of movement. Have a look at the chart below, is it the way you would like to trade in?

No, it is not. It is a very tough market to stay profitable. Unless you like to trade in a range (there are trading strategies which work best in range market condition), you should avoid this kind of market. The best way is to wait until it is over and then start to make money when the trend is back.

Price can be trending up, down or move sideways. Of course, we look for investment opportunities in an up and downtrend, trying to avoid investing when there is no clear direction.

Let’s assume that we have identified an uptrend. Does the price go up all the time? No, it makes higher highs and higher lows. This is a sign for us that there is an uptrend. It may look similar to the example below:

It is similar when there is a downtrend. The price makes lower highs and lower lows. Again, look at the chart below and you should understand it right away:

Can you see the clear sequence of this move? There is a certain noise around it, but you should be able to spot significant highs and lows.

This behavior gives us important information. First of all, we are able to identify the current trend. When we are able to see the higher highs, we can draw the Fibonacci retracement levels. Identification of the turning points (higher highs and higher lows or lower highs and lower lows) is necessary to draw retracement correctly. You can read how to draw it in a little while.

Remember: in some unusual cases, the price will go straight up or down. This happens mostly when some unexpected news is causing panic or euphoria among investors. It looks promising on a chart, but trading this is very hard. You have to take your position early; otherwise, later your entry point will be very risky.

You always start by analyzing higher timeframes

That’s the step nr 1 in your trading with Fibonacci (and any other strategy). Even if you trade on lower timeframes such as 30 or 60-minutes, you still start from higher timeframe.

You go to monthly, then switch to weekly, then daily, then 4-hour and so on. On each timeframe, you look for important support/resistance lines and trendlines.

You also have a look for important price patterns. Things like a dark cloud or pinbars on higher timeframes are usually very powerful and give you an idea in which direction should you trade.

Why higher timeframes are so important?

There are a few reasons.

First, you avoid unnecessary loses. There are no perfect systems and you will have some losing trades, that’s normal and that’s why we have risk and money management. Still, if you can avoid few losing trades your trading record would be probably much better.

When you do a proper analysis on higher timeframes you have knowledge about important trendlines and levels. For example, based on your trading strategy you have a buy signal on the 1-hour timeframe and you want to open a long position. When you checked weekly timeframe, you noticed that there is an important resistance. You decide not to open long trade and you wait for reaction with that level.

The second reason is that thanks to higher timeframes analysis you can find the very good Fibonacci setup. Continuing a previous example. You saw that there is no point to go long because this is strong resistance. At levels like this, we often will see some pullback. Sometimes it will be a short-lived pullback, sometimes longer or even trend reversal. Anyway, this is always a good place to hunt for Fibonacci trade.

Multiple timeframe analysis – preparation

Of course, the situation on higher timeframes such as weekly isn’t that dynamic as on lower timeframe. Thanks to that it is ok to check this higher timeframes from time to time. My recommendation is to analyze them on weekends. Markets are closed and you can focus on analysis without distraction from moving prices.

Many traders talk about Sunday preparation and there is a good reason for that. If you want to have the best results, you have to put your time and effort and prepare for each trading week.

Tools and multiple time frame analysis

Unfortunately, only some charting software allows you to easily analyze the situation on higher timeframes. You can switch between them but you are not able to analyze a few of them at once.

The best tool which can help you do just that is Trading View. When you check right corner you will see different setup options – you can have few timeframes open in different configurations.

Which can look like this:

If your charting software doesn’t have such an option then you can open the same chart twice with different timeframes. This is how I trade in Metatrader – for example, I open 1-hour timeframe (my main timeframe) and second tab with 4-hour or daily timeframe. This way I can place some markups, trendlines etc. on the higher timeframe and my 1-hour timeframe stays clear.

Why this is a good way to analyze the situation at the market?

When you have open only one timeframe, you have to switch between timeframes and you have to mark important levels to have them on lower ones.

With few timeframes open at the same time you see much clearer what is going on. For example, my typical setup is 1-hour, 4-hour and daily or weekly. If price approach 50 average on daily timeframe I see it right away. That’s only a simple example – there will be many times when information from higher timeframe will help you to make better decisions.

Which timeframe is best for trading

There is no simple answer, but there are things you should know.

First, you don’t have to trade on lower timeframes to make more money. That’s an old and stupid myth, still, some people trade on lower timeframes mainly because of that belief.

Statistic says it all – largest number of profitable traders use higher timeframes like 4-hour, daily. When we look at the number of profitable traders on lower timeframes, that number is much lower. There is a reason for that – lower timeframes have more noise and it is very easy to overtrade here.

You should not try to trade on timeframes such as 1-minute, 5-minutes, 15-minutes. These are timeframes where we have too much noise and fast moves. Remember, more than 50% of trades are made by trading robots. We can find many of them trading on lower timeframes and you don’t have chances here to compete with them.

Tradeable timeframes start from 30-minute timeframe. This timeframe is ok for some instruments, for some not.

My recommendation is to select from timeframes such as 1-hour, 4-hour, daily. Although, for some traders, it is best to use 4-hour and daily. Remember, the higher the timeframe the better chances to be profitable with your trading. When you trade on higher timeframe like daily you are able to catch bigger moves. You also can have a day job and spend less time in front of the screen which is also a benefit (the less time you spend in front of the charts, the fewer decisions and overthinking).

Day trading vs swing trading

Fibonacci works great when you look for swings. You can enter during a correction and catch most of the move thanks to Fibonacci Extensions. Swing trading is a way to grow your account. When you use swing trading tactics on higher timeframes, you are able to catch bigger swings (moves). Bigger moves mean bigger profits.

Fibonacci works on every timeframe and you can use it in a day trading for example when you trade on 5-minute or 15-minute timeframe. The moves you will catch will be not that big and it is very easy to overtrade here.

That’s why when you want to select the best timeframe for trading remember that day trading is not the best choice for most traders. You should build your strategy around swing trading on higher timeframes. That’s the combination which will give you the best chances to survive and be profitable.

Long term trading

There is a group of long-term traders who keep the position open for weeks, months or even longer. Usually, they trade stocks or other instruments. They use daily, weekly and monthly timeframes for their analysis. Sometimes they have few accounts – one for normal swing trading on shorter timeframes, other for longterm trading (pension funds and so on).

Longterm strategies are also great. As you already know, Fibonacci works also on higher timeframes so there is no problem to use it on weekly or monthly timeframes, for example, to take profit at 161.8% extension.

Before we move to the entry strategies

There are few important things you should know before we jump into Fibonacci strategies. I collect them together in this chapter because you should be aware of them.

Important – contrarian trading (how to think like a Fibonacci trader)

In short, you look for corrections and you try to enter when they end. For example, when we have an uptrend and there is a correction down then we want to open a trade.

For many new traders that part is hardest to master. Price is going down and I should buy? That’s against a trend.

No, the main trend is up. The short-term trend is down. We look for confirmation that this short-term move ended and then we want to buy. You can learn in the chapter about entries how to do it.

Look where you can find most traps set for retail traders by market makers:

Yes, on the breakouts. That’s why I stopped to trade breakouts many years ago. There are good trades who use breakouts in their strategies. I simply prefer to entry my trades near important retracement levels during a correction. Fewer traps, better risk-reward ratio.

Looking for a correction during a trend is one thing. There are other setups which require you to think like a truth contrarian. Reversals. They give opportunities to make great profits but you have to have a good risk management strategy and follow it.

So we are talking about situation where the trend is well established for some time but we see a sign of reversal and we decide to trade against a trend. Take a look at the example below:

That’s not something that you will learn in most guides which talk mostly about trend trading and following a trend. It may seem risky at first to trade against a trend but it isn’t, especially when you use Fibonacci tools. This setup played during reversals give you good chances to make solid profits. Also, stop loss levels are usually pretty easy to set so it is rather easy to keep your risk management in check.

Still, this is a contrarian thinking about markets that you have to master. Is it a simple correction which I can use to open a trade in the direction of the main trend? Is it a reversal which I can use to open a trade against the main trend?

When you master thinking like a contrarian and join it with Fibonacci techniques, you will be a successful trader.

Fibonacci is not a trend trading

When we trade with Fibonacci, we want to know market conditions – what trend is on the current timeframe, what trend is on higher timeframes. We use trend as our playground to find trades with Fibonacci but we are not trend trading.

Our goal, us Fibonacci traders, is not to catch most of the trend. Fibonacci trading is more to swing trading. We want to catch swing move between point C (end of correction near retracement lined) and point D (end of move-swing at Fibonacci extension line).

You see price approaching your take profit target at Fibonacci extension line, you close a trade when the target is hit. Next, you look for another setup. You do not hope here – oh, maybe this will go higher, maybe this is some stronger move and I should keep it open for a longer period of time.

No.

That’s a rather common mistake that traders initially have good take profit targets but they move them higher or even remove because they think that they catch something big.

Of course, if we see that trend is strong we can use multiple swings with Fibonacci setups to maximize our profits. You will learn about it in the section about trade and money management.

Your job – finding best RR setups

We can find Fibonacci setups on any timeframes. Even more, you can apply Fibonacci levels to almost any swing.

Your job is to select setup with best Risk Reward ratio. To do that, you want to enter a trade deep during a correction. That will give you a good place to set stop loss.

If you enter a trade with small risk (small stop loss) that means that your potential reward will be bigger:

We always want to enter near retracement and close near extension. That means that the better entry is the better overall Risk-Reward.

Do not force yourself into opening trade at every decent setup you see. Sometimes it is a good idea to skip entry and wait for other, better setups.

Quality, not quantity. If you start to look at your Fibonacci setups from the perspective of RR then you will have much better results.

Candle close, confirmation from the price

Markets are changing. I trade for some time and I can tell you that the level of manipulation and false moves is so much bigger than even a few years back. The main reason for that is the larger number of automated trading. Add to that market makers and bulls/bears traps and you have a pretty dangerous mix.

Sure, we had some manipulations or automated trading before so it is not like this is something we should be surprised about.

There is no way to avoid traps and manipulation in 100% of cases. Still, there is a simple thing you can do to at least avoid a few traps here and there.

Wait for candle close before opening a trade.

Do you trade on 1-hour timeframe? Wait for the close of 1-hour candle.

Do you trade on 4-hour timeframe? Wait for the close of 4-hour candle.

And so on. You know what I mean.

On many times you will see the big, beautiful bullish candle. It looks like we have here an engulfing pattern and breaks above the trendline. You don’t want to miss this trade, bulls are crushing it. You open a long position. There are still 40 minutes before there will be a close of a candle. Suddenly, bears start to take control. First, there is a small pullback and shadow (wick) at the top. Bears are pushing the price down harder and candle closes as shooting star and not an engulfing pattern. Next, you observe price getting to new lows and you have still your long position open.

You could avoid that entry if you waited for a close fo a candle.

Market makers like to create false moves to catch retail traders on the wrong side. It can take some time and a few different traps. Eventually, the main move takes place and it is in another direction that most retail traders opened a trade.

Waiting for a close of the candle is not a bulletproof solution for that problem, but it will help you to avoid many traps.

If you have a problem with waiting for a close, add a timer. It is available in many charting software. It simply puts time left to open a new candle. Then you simply decide to wait for the timer to reset (candle to close) to open a trade.

Types of corrections

We have two types of corrections:

• simple correction
• complex correction

Simple correction – as the name says it, is a simple swing move to the C point. After that, we observe continuation in the direction of the main trend.

The complex correction means that we have more action between B and C point before we saw a breakout.

It can be for many reasons:

• Sometimes we have simply a range move in that area and price needs to break out of the box.
• We may observe the forming of harmonic patterns (Gurley and others, more about them in a minute).
• We may observe the forming of a price pattern (wedge, pole, channel or some other).

We should remember about these different types.

Usually, when the move is strong, we can observe a simple corrections time after time. Trading then is easy and we can make good money here.

There are times when correction move will be more complex. We should remember about such a possibility. In cases like this, it is not enough to rely on signals from oscillators – they work well during simple corrections, but during complex ones, they tend to give false signals.

During a complex correction, it is best to use trendlines and look for patterns. On many times you will simply wait for a breakout from that pattern.

We will talk about it more in next chapters. For now, remember that there are different types of corrections. Traders tend to lose money during complex corrections because they follow each signal and as you already know during a complex correction you have many false signals. That’s why trading with patterns is so useful in this kind of moves.

Fibonacci – does it work?

You may find many articles or videos where people debate if Fibonacci really works or not. I want to shortly address this problem.

Authors of all these articles and videos claiming do not fully understand how you trade with Fibonacci.

First, and most important thing, Fibonacci tools are simply that – tools. This is not a ready strategy like for example Ichimoku. With Ichimoku, you have both overviews of the situation in the markets and many signals to go long or short.

Fibonacci tools give you possible levels of resistance/support and possible levels to close a trade. You never know in advance where the current move will end – probably at one of the Fibonacci levels but which one exactly?

Your job is to build a trading strategy around Fibonacci tools. Your trading results depend on that strategy.

This is a goal of this guide – to help you build such a strategy.

Fibonacci works both ways – why is this confusing

That’s something that you will learn when you trade with Fibonacci for some time. You find a swing, place Fibonacci retracement lines and they fit perfect. You open trade but after some time it goes against you. But why? It touched retracement lines. Yes, but if you draw Fibo the other way it will also fit the same swing.

Sometimes it even funny how Fibo works so perfect in both direction. That makes our job to enter in the right way much harder. That’s why we want to use some sort of confirmation before we open a trade.

Just remember that you will find Fibonacci retracement working on the same swing in both directions.

ENTRY STRATEGIES

How to draw the retracement levels? It is easy like ABC

So far, we have learned that it is very rare for a price to move in one direction for a longer time. Surely, when there is panic or euphoria on the market because of some big news, prices may skyrocket and it is hard to enter the trade.

In most cases though, the price moves in zigzag shapes. Some traders call it waves, and there is a scientific concept called Elliott wave theory. But for us, it is important to know the nature of these moves. First, we need to identify a swing move that is a move from point A to point B. We know already that after the main swing there should be a correction in the opposite direction to point C. When we see a move from point A to B, we wait for a move down (correction) to point C. Point C should be located between points A and B. On a chart illustrating an uptrend it may look like this:

It is not always so easy to identify points A, B, and C, but it gets easier with time and experience. When we are sure that we have found the ABC move, we can draw a Fibonacci retracement with a tool from our chart software. We start from the low of swing to the high, so from point A to point B.

If you use candle charts, you should draw from the low of the shadow (or peak) of a candle to the high of a candle. Please, notice that you get much more accurate results when you apply the retracement levels to your candle chart. Compare it with the results from the above chart.

How do you know if you have chosen the right top and bottom? It is a little bit like art and comes with time. At times, when you have two bottoms nearby, even if you have selected the wrong one, it is not going to change the position of the retracement levels so much. Just practice on the price history.

Should the price touch the retracement levels?

This is always a problem for new investors. They think that the retracement to point C is only valid when the price touches down this Fibonacci level. They are wrong. Fibonacci retracements are a great tool, but there is no 100% accuracy. Sometimes the price closes near the retracement level and it can be still a valid move. Just look at the example below.

Example. In a downtrend, there was a correction up. The price looked as if it would move up to 50% retracement level, but it did not happen.

We look at candle close here and we can see that both candles closed below the 38% level so this was our point C and 38% retracement was resistance for the price. Next, the price moved back to a downtrend. On numerous occasions, the price will touch exactly specific retracement level. However, be aware that sometimes it may not look that perfect.
What retracement levels should I use?

It is very confusing at the beginning because there are many Fibonacci retracement levels and some people use only specific ones, while others like to draw all the retracements. My advice is to try to use the standard levels. Over time, when you gain more experience, you will decide which are the most important ones and which ones you prefer to use.

So, which levels should you start with?

• 23.6%
• 38.2%
• 50%
• 61.8%
• 78%
• 88.2%.

Why use 50%? It is not a Fibonacci retracement, but still an important level (half way up or down), so traders like to keep this retracement level together with other proper levels. Stick to these levels and it should be enough to trade well when it comes to price correction.

Strategy – right at retracement line

This is a simple one but you need to practice it a lot. You open a trade right at 61.8% retracement line. You can select another retracement like 78.2% or 88%.

Some people like to use this strategy with 50% retracement but my recommendation is to use 50% on swings on a higher timeframe. They work better there.

How this strategy works.

You don’t wait for confirmation from current timeframe. For example, if you’ve found an AB setup on the 1-hour timeframe, you don’t wait for confirmation, you enter simply right at retracement line. In this example, a pending buy order at 61.8% would be a great entry:

If you really want, you can go to the very low timeframe and wait for confirmation here. Below you can see the same chart but on the 5-minute timeframe. After price hit 61.8% level, there was a nice bullish candle – confirmation that this level works as support (at least at the moment):

But remember – the goal here is to open trade as close to the retracement as possible.

About stop loss. You place it tight. When the position is in profit you move it fast to breakeven.

Few more tips.

This strategy works best on the most important swings so we talk about swings based on major moves. You will find them on higher timeframes like 1h, 4h, daily and other higher.

Some instruments are better to trade with this strategy, some not. Some pairs will respect 61.8%, some will have a tendency to test another retracement like 78.2% etc. You have to check it by yourself.

Check gold – it is respecting 61.8% on many times. It is a good place to start testing this strategy.

What is this strategy is really about?

This strategy may seem strange but there is the logic behind it.

You look for trades with good Risk Reward ratio and with help of this strategy you can have setups just like that. The bigger the RR ratio in your favor, the more failed trades you can have. For example, if you average risk reward 1:5 then you can easily be right only 20% of the time and still make money.

This strategy works because traders and institutions look for these areas to take profits or open positions. On some times you will see the only a small reaction from the price, on other times there will be a turning point and start of a new leg.

Remember that the best chances are on higher timeframes. That means that on lower timeframe like 5 minutes this strategy won’t be as good as on higher timeframe like 4-hour, daily and so on. It is all about the importance of retracement line from bigger swings – the bigger swing, the more important retracement lines are.

Price pattern, price actions strategies

Price patterns are very powerful even when you are trading only with them.

It takes time to master price action, but it is worth to put the effort to learn how to use them in trading. Of course, trading with price action is a very wide topic itself and you can read a book about it. Later in this chapter, I show you how can you use candlestick patterns together with Fibonacci.

When we look for candles

The improtant thing to remember about. Most of the candlestick patterns described later can occur at different stages of the move. That means that they can place in the middle of the trend, in the end, and so on. Our goal is to find candlestick patterns at the end of correction which will be our entry signal. We ignore these patterns in the middle of the move.

Fibonacci and bearish candlestick patterns

In this part, we will have a look at bearish candlesticks which help us to open short positions.

Shooting star

A shooting star is a very characteristic candle with a small body and long shadow. When we see shooting star near the retracement line then we have important information that this level is a strong resistance for the price.

Stop loss is set tide – it may be set right above shooting star or above next retracement line. In the example above stop could be placed above 78.2% retracement.

We want to see a shooting star at the end of a strong move up like in the example above. Sometimes we will see them in range moves like below. In cases like this you should ignore them:

Evening Doji Star

It is simply a doji candle at the end of move up. This is a candle which you can see on rare occasions. If you spot it like in this example, near the retracement line that means that bulls and bear are fighting at this level. What you want to see after that is another bearish candle as a confirmation. Then you can enter.

Below you can see that later there was some manipulation and stop hunting, but the signal from doji was valid. It showed us that area near 78.2% retracement is a resistance.

In the next example, you can see a doji right at 61.8% retracement and next, near 50% retracement. This way we got multiple signs that these retracement lines work and that this Fibonacci retracement setup is valid.

Dark Cloud Pattern

My favorite price pattern. Very clear information about what is going on with the price and who is winning.

We look at two candles. The first candle is bullish, second bearish.

We can read this price action like this:

We saw a bullish candle. After that, the next candle opened higher but bulls were too weak and bears took control. That means that we can expect at least some correction down.

Stop loss is tight, you can wait for another candle to confirm that bears are in control.

I prefer to place my entry point a few points below dark cloud candle. Just like in the example below. There was a dark cloud pattern near 38.2 retracements but next, we saw the last attempt to go higher. In the end, this 38.2% level was still holding as resistance and price went down. Short entry placed a few pips below dark cloud would be perfect.

In the next example, dark cloud was right at 78.2% retracement line. Again, entry few pips below this dark cloud and tight stop loss above would be a perfect setup here.

Sometimes you will see dark cloud many times during a trending move. Traders like to check how big the cloud is. You can see that the first dark cloud marked below was rather small. Especially when you compare it with the second one, which was much bigger. This is another thing you can check when you look for the dark cloud.

Bearish Engulfing Pattern

In this pattern, a bearish candle has a bigger body than a bullish candle before. What’s more, open from the bearish candle is higher and close is lower than open and close of the bullish candle.

That’s a clear indication that bears are stronger, at least at the moment. We can use this pattern as a signal to entry short. My suggestion would be to use it only if it takes place near some important retracement line. In the example below bearish engulfing pattern can be seen near 88.2% retracement line, a few hours later near 61.8% retracement. This was good places to enter a short position.

As mention before, I use a bearish engulfing pattern only when it is near an important retracement line. You will see this pattern a lot more. You can use it for other analysis. The bearish engulfing pattern can take place at the end of the move like in the example below. If you see this pattern in a strong uptrend that means that change in direction is possible.

You can also see this pattern during stronger downtrends. This is simply a validation that trend is strong and continuation of move down is possible.

In the example below, you can see two bearish engulfing patterns next to each other after a strong move up. This was a very strong indication that we can see a change in direction. Later we saw another try from the bulls and eventually bears took control. On the right side of the chart, in the downtrend, you can see another two bearish engulfing patterns – information that trend is strong and the price will probably go down even more.

Bullish candlestick patterns

In this section, we will have a look at bullish patterns which help us to decide when to open a long position during a correction.

Bullish hammer

Small body, long shadow below. That means that bears tried to push price lower but bulls came back with bigger force. This is a good reversal candle because it shows us a place in which there might be a change in control over trend.

When we see bullish hammer near retracement line that means that bulls may try to attack further from this specific retracement.

Stop loss is tight, you can enter right above the hammer candle.

In the example below, we can see a few hammer candles. First, at the end of correction at 61.8% retracement line, next at 38.2% retracement line. That was information that buyers were using these retracement levels to open long positions. Next, there was a move to 200% extension.

After that, we saw another, third hammer but this time the trend changed.

Piercing line pattern

A pattern similar to a dark cloud, just for the other side. We have a bearish candle, after that there is an open lower but bulls come back with force.

This candle pattern is pretty common, you will see it a lot during trend moves. It can work as a signal but only if it takes place near important retracement line. In the example below there was a piercing line pattern right at 61.8% retracement – indication that after correction bulls try to move price higher from that place.

Bullish Engulfing pattern

A pattern similar to bearish engulfing. We look at two candles. First is bearish, the second one is bullish with a body bigger than the first candle.

Again, you want to take it as a signal if this pattern is near important retracement line. You will see it a lot during a strong trend moves. If there is no important resistance line nearby, just ignore it.

Price patterns – things to remember about

As I mentioned a few times before, we look for price pattern in specific conditions – during a correction.

You will see these patterns a lot in different situations but that doesn’t mean that you should take action each time.

That’s why it is important to identify trend first. If you identified the trend and you see that price is making higher highs then you know that you look for bullish candle patterns during a correction. You know that you should ignore these bullish patterns during a downtrend.

Just like in the example below where we had a bullish engulfing pattern. The main trend was down so they should be ignored.

Another thing to remember about is trade management. You never know in advance if you selected the right direction to open a trade. To make things harder, on many times Fibonacci will work in both ways (I wrote about it in a different section).

Let’s have a look at the example below. We selected AB swing and put our retracement lines on it. There was a correction to the 78.2% retracement line. Next, there was a bullish engulfing pattern, a good place to go long. So we did. Price went up a bit but there was some resistance (box marked on the chart). We can see in the box shooting star, later there was a bearish engulfing pattern. These were signals that there is some resistance in the place and reversal is possible. At least we should move our stop loss to the entry point because of these warning signs.

In the end, this was a reversal for the price. The correct way to draw Fibonacci was the other way to look for short. We made a mistake but with good trade management, we protect our capital.

How to learn candlestick patterns

Trading with candlestick patterns is hard at the beginning. Later, with practice, it is much easier. I noticed that some traders find it hard to use price action in their trading. If you have a similar problem I have a few tips for you.

Buy a book about candlesticks and price action. There are a few good titles to chose from. Try to read this book a few times – so read it once, trade for some time and after a few months go back to it. You will have more knowledge and experience and you will find new interesting things in the book by reading it again. It is a good idea to make notes and mark the most important things on book pages. This way it will be easier to read it through again and to remind yourself about the most important things.

Next is exercise. Books are ok, but in the end, you need to learn by yourself to recognize and trade specific price patterns. The best way to do that is to trade on naked charts (no indicators, only candles). If you want to make things faster, you can use price action trading in backtesting specific pairs.

Candlestick patterns tools

If you struggle to spot some price patterns you can use tools which can help you with that. There are different tools in many charting platforms. For example, in Metatrader 4 you can use the free tool – Pattern Recognition Master: https://www.earnforex.com/metatrader-indicators/Pattern-Recognition-Master/

It gives you a lot of information so it is recommended to select few most important patterns you trade. You can do it in the options window:

Fibonacci combined with oscillators – strategies

In this part, we will look for options we have when it comes to opening a Fibonacci trade with signal from the oscillator.

Oscillator – good or bad?

There is this ongoing discussion about oscillators. In short, oscillators have bad publicity, especially in recent years, and you can see many traders who do not accept trading with oscillators. They even make fun of people who use oscillators.
For me, this ebook is not the place to go deep in that discussion and discuss the pros and cons.

In the end, it is your decision.

If you feel that patterns and price actions are the best choice and you prefer naked chart than that’s totally fine. You will find many great Fibonacci trading ideas which don’t use oscillators. In that case, feel free to skip this chapter.

I personally use some oscillators in my trading. Still, I believe that they work best when you join them with price action, patterns, trend lines. There was no single situation when I would go with my trade only because of the signal from the oscillator. I want to see a bigger picture and then use oscillators.

Understand why we use an oscillator

Of course, we want to use an oscillator to give us a signal to open a trade. Still, that is a little more complicated. You have to understand what kind of entry we look for.

You know that in most strategies based on Fibonacci, we wait for the correction to the retracement line. To be more specific:

in an uptrend, we look for a correction down to the retracement line and we want oscillator to be in the oversold area:

in a downtrend we look for correction up to the retracement line and we want oscillator to be in the overbought area:

Thanks to the oscillators we want to avoid situations like:

• going long when the oscillator is overbought
• going short when the oscillator is oversold

These are the worst places to open a trade. The reason is that we might be right about an overall direction of the move but there will be some correction which will stop us out.

When we follow the plan (open the short trade when the price is overbought, open the long trade when the price is oversold) we have better chances to open a trade during the end of a correction.

Important – what we want to avoid

First, let’s have a look at the trade that we want to avoid. On the chart below you can see two things – trade which was open at the breakout and place where you should open a trade. Have a closer look and compare price with stochastic position:

Let’s analyze the buy itself. Long position was opened right after the breakout. First, it looked very promising but the price quickly turned south. Look where stochastic was at the moment of buy – it was deeply in overbought area.

The overbought area in most cases is not a place where we want to buy.

Now, let’s move back and check entry you should’ve taken. You can see that stochastic was in an oversold area, the price was near 50% retracement line and after that, we saw a signal from stochastic.

We look for long trades near retracement lines, ideally with an oscillator in the oversold area.

We look for short trades near retracement lines, ideally with an oscillator in the overbought area.

Remember about it when we will analyze examples in next parts.

Strategy – Fibonacci and Stochastic

Stochastic is a good indicator to look for the entry. We have clear areas of oversold (below 20) and overbought (above 80).

You can trade with a few different approaches. I will show you how I use stochastic in my trading with Fibonacci.

Settings.

I prefer to use stochastic with settings like:

• 14, 3, 3
• 12, 2, 2
• 8, 3, 3

It depends from instrument you trade and you should test which settings work best for you.

Signals.

When my trade is based on stochastic then I use mostly two kinds of signals:

• cross of the stochastic line from the top with 80 lines (like in the chart below) is a sell signal
• cross of the stochastic line from the bottom with 20 lines is a buy signal
• in trending conditions, I use the cross with 50 lines as a signal to go long or short

On the example below, you can see simple correction ABC. After retracement to 61.8%, there was a cross of stochastic line with 80 line – signal to go short. Later on, we had another, similar signal, but we were there already in a short position.

This is a nice example of what we were talking about:

• we look for swing AB and correction to C
• we use an oscillator to find buy/sell signall near important retracement line

You can join stochastic with other signals. Sometimes you may want to wait for confirmation – it may be a breakthrough a trendline like in the chart below. You can see that after correction to C we saw first a buy signal from stochastic when stochastic line crossed with 20 levels, next there was a breakthrough trendline and break through 50 lines.

As always, trade management is very important. Signals from oscillators are not always right. Sometimes there will be a situation when you were right but market condition changed. Let’s have a look at the example below. We spotted an ABC pattern, put Fibonacci lines on it. Next, there was a signal from stochastic to buy. Later there was another one with additional breakthrough trendline. So far, so good.

Situation changed. You can see that price moved a little bit up and there was a resistance there. Price was changing its direction. We should be looking for a short, not a long position. Still, when we spotted that there is something wrong with an uptrend and there was a break below the green trendline, we closed a trade.

When you have a trade open in one direction, you look for potential signs that this trend is in danger. Things like a break through a temporary trendline line (like in the example below) or reversal candles.

Remember, if you see that something is wrong then it is better to close trade and wait for another opportunity.

Of course, let’s not forget about looking at price itself. In the example below, you can see a simple correction to the 61.8% retracement line, next to a sell signal from stochastic and few candles with small bodies and long upper shadows – a clear sign that bears are stronger here.

Strategy – Fibonacci, and RSI

From my experience, I can tell that RSI is a great indicator if you look for divergence. I wrote about the divergence in separate part so now let’s have a look at trading with RSI and crosses.

Can you use RSI to look for signals to buy and sell? Yes. It has a tendency to give you some false signals during a range moves but when markets are trending then you can easily work with it.

Settings

The setting depends on the instrument you trade so there is no single universal number. The most popular settings used by traders are 7, 9, 10 or 14. Which one will be best for you? You have to test in on price history.

Signals

In RSI an overbought area is above 70 levels, an oversold area is below 30 levels. Do you prefer to use 80 and 20 levels? That’s up to you and your strategy.

It is rather rare that RSI will be above 70 or below 30 levels. That means that when we have crossed with these levels then we get signals to go short or long.

Like in the example below, after correction up RSI was for a moment above 70 levels. Right after that, we saw it back below 70 lines. That was our signal to go short.

In the example below there was a strong move up which we used to draw our ABC pattern. RSI went down below 30 levels, next it went back. This cross with 30 levels was our point to open a long position.

In some market conditions price might not get to the overbought or oversold areas. In that case, we may use the cross with 50 levels as a signal. Just remember that during range moves you will get many crosses with 50 (so many false signals):

RSI can be a great help when you want to manage your trade and protect profit. First, look at this example and I will explain how to use it:

You can see that after deep correction to the C retracement level (88.2) there was a cross with 50 lines. We went short here.

We expected a move down to the extension lines. But before that price needs to go through B point which was support in that case. Look what happened on RSI. It went to an oversold condition and came back above 30 lines. That was a good place to close trade and take a profit we had at that time.

Another way RSI can help you is to clarify the entry point. Below you can see range move below 38.2% retracement line. It was hard to find an entry point. We used trendline applied to RSI itself. Eventually, there was a clear break through this trendline and that was our signal to go short.

Strategy – Fibonacci, and CCI

CCI is a popular indicator. We can find here the overbought and oversold area. In the middle, there is a 0 line. what are overbought and oversold levels? You have to define them. Most popular levels are:

• 200
• 100
• 0
• -100
• -200

Used together.

So which level is oversold? I use it that way:

• if CCI is above 100 level then it is in the overbought area
• if CCI is above 200 level then it is in heavy overbought area
• if CCI is below 100 level then it is in oversold area
• if CCI is below 200 level then it is in heavy oversold area

How to use that information with signals? I write about it in a moment.

What length is best for CCI? Again, you have to test it on the instrument you trade. Many traders use shorter periods for CCI like 14 or 21. I prefer a little bit longer like 34 or 50 because there is less noise and for me, signals are better.

Similar to the RSI, with CCI you get nice signals during trend moves and some false signals in range conditions.

Below we can see a correction to the 38.2% retracement. CCI went almost to 200 level and then turned down and crossed with 100 level. This was a good point to enter a short position:

Sometimes, during strong trends, we can use cross with 0 lines as a signal to open a trade. Just like in the example below:

It is rare for CCI to go above 200 or below -200 levels during a correction moves. When you see CCI at these levels, watch for the cross to open a trade. In the example below there was a deep correction up to 78.2% retracement line, CCI went above 200 level. Cross back with 200 was a good place to open a short position. We also had a dark cloud price pattern at the same time so another confirmation to open a trade.

Is CCI a good indicator to use it as a signal to open a trade? Depends. I prefer Stochastic but there are markers and timeframes when CCI is better. For example, I like to use CCI when I trade stocks. There is really no simple answer here and you have to test it.

Also, there is a cool way to use CCI to predict when to exit a profitable trade in a strong trend. I show it in the section about closing a trade.

Other oscillators

What about other oscillators? There are many of them and some traders have their favorite ones. I described you my favorite three oscillators that I used in the past with good results.

If you prefer to use other oscillators that’s fine. As I wrote before, you have to test in on the price history. Some oscillators may be better than others on specific timeframes or instruments.

Divergence

Of course, you can use oscillators to look for divergence.

Some oscillators are bad when it comes to signals like MACD. It’s very laggy, you get signals late. Still, MACD works great when you look for divergence. That’s something you should know – we can use oscillators for other things than the signal from crosses.

Divergence can be a great addition to your trading plan. It is so important that I write about it in separate part of this guide.

Fibonacci combined with moving averages – strategies

There are some traders who are against using averages. Personally, I find them helpful in Fibonacci trading, that’s why I decided to write about them in this part.

Pros and cons of averages

First, averages are pretty useless when it comes to using them as a signal when they cross. Some people still try to build a system around averages crossover, but my advice is to not waste time on such approach.

We look at them mostly as potential support and resistance levels. Later on, I show you how to combine that information with Fibonacci trading.

Which averages

Traders prefer different averages so you have to test it by yourself. Most popular ones are 21, 50, 100, 200.

There was a time when I was using mostly 200 but I changed it. The thing is, during stronger moves price has to first go through 21, 50 and 100 and for me, these averages are the most important.

I would recommend looking at 50 average, especially on higher timeframes. 50 MA on 4-hour or daily or weekly can be a serious support/resistance for the price and in many cases, you will see some reaction from the price when it will approach this level.

What types of averages

Most popular ones are expotential or simple. Personally I use expotential averages.

Few tips about setting averages

Remember – average 200 on 1-hour timeframe is an average 50 from 4-hour timeframe. You can calculate other averages like this. I mention this because sometimes people do forget about this simple relation between averages.

In some charting software you can hide average on a specific timeframe. For example, if you want to have on 1-hour timeframe 50 and 100 averages and on 4-hour you want only 100 then you can specify in the settings of the average. This is an example from Metatrader:

Averages and Fibonacci

Question is how we combine averages and Fibonacci trading? As we already know, they work great as support and resistance. There is another information – when trending, price tends to stay on one side of average.

That’s why we can use the average for two different things:

• use average combined with a Fibonacci retracement to enter a trade (when the price is bouncing from average during a correction)
• use average combined with Fibonacci extensions to close a trade (we set take profit target at extension lines which are closest to the average)

In my trading, I use for that mostly 100 and 50 averages. Below you will find a few examples which should help you to understand how to trade with them.

Strategy – 50 averages watch

50 average is among popular averages or we can even call it the most popular one. Traders watch it, like to take profit at this average or to open position here. That’s why it is a good idea to see if this is an average which will work well with your trading plan and approach.

Few things are worth to notice.

Watch for the 50s from higher timeframes. Yes, 50 usually works on each timeframe but you know that the higher timeframe the more important information for us. That’s also true for 50 average. You should pay attention to 50 average on 4-hour, daily, weekly or even monthly timeframes. When price approaches them at this timeframes you may expect some reaction when they meet.

That’s important especially when you have an open position with some profit running. You look for best take profit targets, you use the Fibonacci extension but you want to check if there is a 50 on the way. If there is one, it is a good idea to close a trade.

50 average works great when you look for a good entry point for your trade. As I mentioned, this is an important average because many traders use it. There is one more reason – when trend is strong, price respect 50 and stay on one side for most of the time:

With that said, if there is a correction, it often ends right at 50. We can use that with a combination of Fibonacci retracement to find the best level to open position.

Some traders like to open a trade exactly at the confluence of 50 and Fib retracement like in the example below:

Some traders like to have another confirmation that 50 is working as a support/resistance. The best confirmation comes from the price itself. So we use price action and we look for reversal candles or reversal price pattern candles after contact with 50 average.

In the example below you can see a shooting star, a good confirmation that average is working as a resistance:

In the next example, we can see a bullish engulfing pattern. After that we saw a strong move down to 161.8% extension line:

Some prefer to wait for a signal from price action or breakthrough trendline. You can see that on the next example. Price went up to the 50 average which worked as a resistance. On the other side, we could draw a trendline which was for a moment support for the price. It was best to wait for the price to close below that trendline to enter a trade:

Sometimes 50 will work as support/resistance but for a moment and there will be some movement on both sides of this average. In cases like this, I have a simple tip – mark temporary low and high with horizontal support/resistance line and wait for the breakout. That way you will avoid overtrading because in that kind of movement you will see many false signals both from price itself and oscillators.

50 average is very important and as I wrote before – the higher the timeframe, the more important information from that timeframe. That means that even if you trade on the 1-hour timeframe you should also check where is 50 on 4-hour, daily and weekly timeframes. Price in most cases will react with 50 average, at least for a moment.

Strategy – 100 averages watch

I find 100s approach very powerful. We are using here 100 averages on 1-hour, 4-hour, daily and higher timeframes.

Few things are worth to notice.

100 average can work as support/resistance similar to 50 average:

When trending, price tends to stay on one side of 100 average:

If you trade mostly on 1-hour timeframe then you can add 100 and 400 averages. As you already know, 400 on 1-hour timeframe is equal to 100 on 4-hour timeframe.

I use them a lot as take profit targets.

For example, the price is below 100, there was a change in the direction. The open position is long. I see that 100 is very near to the important extension of 161.8%. This would be most likely my take profit target.

Another example, the price is above 100 average and is moving up. The position is long. I can see that 400 average is near the extension line. You know now that 400 average on 1-hour is simply 100 average from 4-hour timeframe. This will be most likely my take profit target.

Take a look at price history and you will notice how often 100 average is a support/resistance for the price, at least for some time. That is why, when we have a trade open and it is approaching 100 then we want to close it here to take our profits.

What about opening trade with the help of 100 average? Well, that’s the scenario that you should be familiar with. During stronger trends, correction will end up right at 50 or 100 average. You wait for confirmation from the price – you want to see a reversal candle or breakthrough temporary support.

In the example below you can see that price tried twice to go up but 78.2% retracement together with 100 average was a strong resistance for the price. At first reaction we saw a shooting star, after that there was a bearish engulfing pattern – both places great to open a short position:

In this case, during a correction down, 100 average worked as a support for the price. Still, there was a clear resistance trendline. It was best to wait for the price to close above that trendline:

You don’t have to wait for the price to touch 100 average to open a trade. As I showed you before, during stronger trends price will stay on one side of 100 average for a longer period of time. If the trend is very strong then it will be hard for the price to go during a correction to the 100. It is ok to look for a trade even when price hasn’t touched a 100. Like in the example below. Strong move down, we find an AB swing, correction, and signal from stochastic. A good short entry:

What about 200 averages?

I mentioned before that in most cases it is recommended to go with 50 or 100. What about 200 average?

Yes, this average is still important. I usually check it on higher timeframes like 4-hour, daily, weekly, monthly. When I see that price is getting near to that average I expect some reaction, maybe some countertrend trade which I enter on the lower timeframe.

And that’s it. Remember, before 200 we have 50 and 100 and from my experience, it is better to build a trading plan around them.

Strategy – Fibonacci and the zone

This is a strategy that I use often in my daily trading. It is easier to understand when you open it on the chart. The 240 zone is a great help to identify support and resistance lines.

Setup

I prepared templates that you can use. You can also add this zone by yourself. You have to add:

• 240 simple moving average
• 240 simple envelope with 0.10 deviation
• 240 simple envelope with 0.20 deviation

You can use different colors for each line to make it more clear on the chart.

What is a 240 zone?

It is 240 simple average and area near that average marked with envelopes. I was looking for the best parameters and this 240 period is most universal.

This zone is a place that price tends to come back. When there is no trend then the price will oscillate around the zone. When there is a stronger trend then zone will work as support or resistance.

So it gives us possible levels of support and resistance. It is also a nice representation of the current situation in the market.

On the example below, you can see that zone worked as temporary support and there was a range move here. Later price broke down below the zone and started to move down. There was a correction up but the zone worked as a resistance. Later, after trend changed direction, zone worked as support.

How to use zone with Fibonacci

I like to use zone with Fibonacci because it gives me information about the current situation in the market and helps to entry during a correction move. Let’s check some examples and you understand what I mean.

On the example below, you can see big white candle – price went through the zone with no effort. That was a sign that a possible change in direction is possible. Next, it was best to wait for a correction. The correction down stopped almost exactly in the middle of the zone which started to work as a support. This was also a place where we had Fibonacci retracement lines. This was a good place to look for long position.

On another example, you can see that first there was some support from the zone but later price managed to go down.

After a move down, there was a correction up. Price was trapped for a moment inside the zone – upper envelope worked as resistance and lower as support. Finally, there was a break below the trendline – a good place to open a short position.

Next example. Price went down to the other side of the zone. Now we assume that zone is working as resistance and that we look for short opportunities. With that information, we could easily find some AB swings to use with our Fibonacci setup.

A zone can often stop the price for some time. Thanks to that we can use trendlines and wait for the price to decide in which direction will be next move.

Using the zone is easy. You have to watch closely how it is reacting to the price. You can find many good setups around the zone because many stronger swings start right here.

Strategy – Fibonacci and trend lines

Sometimes the price trends very nicely and it is easy to see the trend line. In such a case there is a strong chance that when it comes to correction, it will end at a Fibonacci retracement level closest to the trend line.

Fibonacci works great in the trending markets, so it is a good idea to combine Fibonacci retracement tools with trendlines. First, you have to draw a trend line.

Let’s assume you are waiting for a retest of this line. In the meantime, you can also draw the Fibonacci retracement levels from a low to high swing.

The correction ended at the 61.8 retracement level and the price touched the trend line. As it turned out, it was a great point to enter the trade.

You can play this scenario by entering the near retracement level and trend line. You put your stop loss below the trend line, but not too far from it. With a strong trend in place, you assume it is a low-risk entry.

It does not always work this well, but sometimes it does. You have to be very watchful about these kinds of price behavior because these are good points to enter a trade. The potential risk of loss is small and the potential profit is big.

Fibonacci and Pivot Points strategies

My favorite way of swing trading is to join Pivot Points with Fibonacci. This can give you many good trading setups. In this chapter, I will write more about Pivot Points and I will share with you my favorite strategies.

Remember

Pivot Points work but it doesn’t mean that you should rely only on them. You still should analyze higher timeframes, look for important trendlines, zones. In short, you want to have a full picture with all important areas where price may react.

What are Pivot Points

Pivot points are used by floor traders. They are calculated based on the previous candle. The formula is simple:

If we talk about daily Pivot Points then they are calculated based on the candle from the previous day. When we talk about weekly Pivot Points, they are calculated based on previous week candle and so on.

Types of Pivot Points

We have classic Pivot Points but there are some variations like Camarilla and others. In this course, I will stick to classic Pivots because in my opinion, they work best.

Classic Pivots can be divided based on timeframe:

• 1-hour Pivot Points
• 4-hour Pivot Points
• Daily Pivot Points
• Weekly Pivot Points
• Monthly Pivot Points
• Yearly Pivot Points
• other

As you can see, we can take any timeframe and calculate Pivot Points based on that timeframe.

Which Pivot Points should you use? On what timeframe?

4-hour Pivot Points, 1-hour Pivot Points and lower are used in automated trading and this is not something that we want to use in our trading.

Most popular ones are daily and weekly Pivot Points. Monthly Pivots are used by traders who prefer swing trading with longer time of hold.

In practice combination like the ones below work best:

• 5-min, 15-min timeframe chart with daily Pivot Points
• 30-min, 1-hour timeframe chart with daily or weekly Pivot Points
• 4-hour timeframe chart with weekly or monthly Pivot Points
• Daily timeframe chart with monthly Pivot Points

You have to find the best timeframe to look for setups with Pivot Points. In my case, it is usually 1-hour timeframe with weekly Pivot Points.

Lines in Pivot Points

Pivot Points are easy to understand:

• We have a middle line which is called the Pivot line.
• Above Pivot line we have resistance lines – R1, R2, R3 and so on.
• Below Pivot line we have support lines – S1, S2, S3 and so on.

Based on the formula we can calculate other levels like S4, S5 or R4, R5 but in practice, it is rare to see price reach R3 or S3 lines.

We can also calculate M lines which are simply lines in the middle:

Importance of specific lines

In range market, you will see price oscillating around the middle line (pivot).

In trending markets, you can expect traders to take profit at support and resistance lines.

Basically, they work the same R1, R2, R3 are resistance, S1, S2, S3 are support lines but there are some nuances.

S1 and R1 are the first targets for the price so they are hit quite often. Sometimes they will be a final target for the price. More often they will be a temporary stop for the price.

S2 and R2 lines are the most important ones. Usually, they are a place where traders take profits or place counter-trend trades.

It is hard for the price to go to the S3, R3 lines because on the way there are first and second lines of support and resistance. If the price can reach S3 or R3 that means that move was strong. It is an unusual situation. Because of that traders will most likely take profit at this third levels and look for counter-trend.

Pivot line works different depending on that if we have a trending market or flat market. when there is a flat market price will oscillate around the pivot line. When there is a trend in place, there are better chances that pivot will work as support or resistance for the price.

M lines can work similar to S and R lines. So M lines above the pivot line can work as resistance, M lines below pivot can work as support. I pay attention especially for M lines from weekly and monthly Pivot Points.

Strategy – Fibo and second line

Second lines – S2 and R2 are the most important ones. On many times you can expect here some reaction from the price. Sometimes they will be so strong that price reverse, sometimes they only stop price for some time.

Thanks to that knowledge we know in which direction look for a trade:

• When the trend is down and price approach S2 line we look for long opportunity.
• When the trend is up and price approach R2 line we look for short opportunity.

So yeah, a little counter-trading here, but we know that these levels can be a reversal point.

There will be times that price will get near R2/S2 line but will be stopped near M line:

That’s ok. You simply observe what price is doing and check if there is a new top or bottom forming near those levels.

First, we want to see failed attempt to make new low or high:

When we see this near the S2/R2 line then we know that this might be a good swing to use the Fibonacci setup in another direction. We open position based on methods described in this book (price action, breakouts from patterns and so on).

On the example below, we look at eur/usd 1-hour timeframe with weekly pivot points. Strong push up to the weekly R2 level. Looks like the price will continue to move up, for a moment it was above that level. We saw a strong selloff from here – this was our potential AB swing for short position. Later price tried to move up but it only managed to go to the 50% retracement and M-line. Eventually, there was a signal from stochastic and close below 50 average – a great place to open a short position.

You want to place stop a little bit wider. If you have to open a smaller position so you place a wider stop loss. In this setups, I place my stop loss below/above B points. If the price is reversing, it might be choppy for a moment so the price will move between A and B, finding support/resistance at different retracement lines. With tight stop loss you would be stopped out but thanks to wider stop loss in that scenario, you avoid that noise.

It is not always a perfect touch with S2 / R2 levels. That’s why the resistance (overbought) zone is marked in red and support (oversold) zone is green. The next example is a great illustration of that. We have again a eur/USD 1-hour timeframe with weekly pivots.

We have three weeks on the chart. During a first week, price was in a strong move up which ended between M line and weekly R2 line. You can see that there was some distance between price and that R2 line. For contrast, in the next two weeks, weekly R1 line worked perfectly as a resistance.

But let’s go back to the first week of our example. Can you spot a reversal pattern?

Let’s zoom in. We are looking at the same chart, only closer. First, there was a strong push up which stopped somewhere between M-Line (the bottom of red zone) and R2 line. Next was a strong selloff which ended at 50 average. Here bulls decided to give it another try.

Price went up but it stopped at 88.2% retracement line. We saw here a candle with long upper shadow and signal to go short from stochastic. There was also a divergence.

Next small move down and another try to go up. Again, 88.2% retracement worked as resistance and we saw a bearish engulfing pattern.

In the end, price moved down and it was the start of a stronger move down.

That’s a great example of how you can combine different information to decide in which direction you want to trade.

Another variant of this strategy is to wait for the double top at S2 or double bottom at R2 line. This is places where this pattern is pretty common.

Of course, we should remember that near S2 and R2 lines we may expect false breakouts and traps. Sometimes, simply the main trend will be stronger and the price will go back to its direction. Next example is a good illustration of that.

First, strong move down. Price went down through S2 level but then buyers came back. Later we could find our ABC pattern. There was a breakout above a trendline, also a signal from stochastic. We went long here. First, this trade looked good. There was some movement up and it looked promising. Eventually, sellers took initiative. Price went down, we saw a breakthrough a green support line. It was best to close trade and wait for another setup.

Remember that when you look for this kind of setup then you are going against the main trend. Reversal trades can be very profitable but you have to remember about trade management. If you see that something is now right it is better to close a trade. At least remember about moving stop loss to the entry when your position is in some profit so you trade is breakeven.

Sometimes there is no time and you have to act based on price action itself. Next chart is a great example of that. R2 resistance line was a target for buyers. On the other hand, sellers started to open positions here. We saw two bearish engulfing patterns and then a strong selloff. This is a great reminder that price action is very important and in some cases, it will be much faster than other signals.

Strategy – Fibo and third line

This is a strategy similar to the previous one. So just like in the second line strategy, you look for swing and correction to open a trade:

There is one more strategy you can use in that area. As I wrote before, it is very rare for the price to reach R3 or S3 lines. On many times (but of course not 100% of the time) they will work as strong resistance or support. Because of that, you may look for entry right at these lines. In other words, you do not wait for classic ABC Fibo pattern (swing, correction to C, entry) but you open position right at the third level.

Usually, it is best to wait for confirmation from the price. You look for things like:

• reversal candles (for R3 line, for example, shooting star, dark cloud, for S3 line hammer, piercing line)
• breakthrough trendline / local support or resistance line

Some examples.

Below we have a 15-minutes chart of aud/usd with daily pivot points. First, let’s notice that R2 level worked as strong resistance and there was a strong selloff from here. Still, buyers where stronger and price came back to the direction of the main trend. You can see that next there was an explosive move up which overshoot R3 level. it looked very promising for some retail traders who probably were opening long positions at this place. They wanted to jump into this profit train. You can see that this was a trap. There was a strong selloff, next to some move up. This time R3 level worked perfectly as a resistance. We could use here many types of signals – price action, break below the trendline, the signal from stochastic and so on. First, you look at price behavior against these pivot lines. This gives you information in which direction you want to trade.

Actually, let’s have a look at the same chart but with Fibonacci tools and with signals. You can see that after second attempt to force R3 line there was a bearish engulfing pattern at the 78.2% level, signal from stochastic and break below trendline:

In most cases, R3/S3 lines work as very strong resistance and support levels. Still, you should remember that sometimes move will be so strong that price will ignore these lines. That’s common especially during publications of important data or because of some news. Then price goes through our R3/S3 lines. You can see such an example below:

When you open trade and price reversed according to the plan, you can add another position later during a correction move.

Then you look for taking profit targets for your all trades based on extension lines.

Strategy – Fibo and M line

In previous examples, we saw moves that reached second or third lines. Sometimes price will be stopped by M-line which is not that rare. As always, you look for confirmation from the price. When you see that M-line is working and there is an AB swing then you can look for a setup.

Below you can see 15-minutes eur/usd with daily pivot points. There was a strong move down which stopped exactly at M-line (between S1 and S2 levels). From there we saw a strong move up which was stopped at pivot line.

It was too soon to tell what will be next. Eventually, there was a correction to 50% retracement and I’ve moved higher above 50 average. We also saw a signal from stochastic. This was a good place to enter a trade.

Strategy – Fibo and bounce from Pivot

Pivot can work as a support or resistance if there is a strong trend. With that knowledge, we can use this place to open a trade. On many times during a trend, we will see a correction to the pivot line. Next, we look for confirmation from price action, price pattern or trendline breakout.

On the chart below you can see that after correction up pivot line worked as resistance from the price. In cases like this, you look for confirmation from the price action. You may also use another signal to open a trade like a signal from the oscillator. You can enter position right at this pivot level with tight stop loss.

Another option is to wait until the price will go back to the direction of the main trend. Usually, we will see a breakthrough the temporary trendline (marked in red below) as a confirmation.

Next example shows us two places where we could go long. We look at aud/usd, 1-hour timeframe with weekly pivot points.

You can see that correction ended at pivot line but this level was tested twice. Because of that, we got two signals from stochastic to open a long position. This was a good place to open a long position because we could set stop loss not too far away from the pivot. That way we got low-risk entry.

If you decided to wait for the breakthrough trendline then your entry would be little late but in this case, you would still catch a good portion of the move.

Strategy – the confluence of Fibonacci levels

The best way to use confluence is to trade it with tight stop loss. Confluence level should be a strong support/resistance for the price. If it can’t hold it then you should close a trade. That’s why setting a tighter stop loss is a better way in my opinion.

The convergence can be very useful, but many new traders do not know or remember to look for it. It is not that complicated, which I will show in this chapter.

Before you start to look for Fibonacci convergence you should feel comfortable with using the Fibonacci retracement and extension levels. You should be able to easily choose the price swings to draw them. If you are not that experienced, do not worry! Just read this chapter or skip it and return to study it later when you will have more experience in using the retracement and extension.

In the beginning, I wrote that the price moves in a zigzag formation. I showed you how you can choose the swing to draw the Fibonacci retracement or extension. Trends are built upon many different swings.

The convergence is a situation when you draw the Fibonacci retracement lines for more than one swing and when some of the levels are close to each other.

In the example below the price moves up making many swings. There are a couple of good points to choose to draw the Fibonacci retracement. Which one would you choose?

The one below is very easy to spot, so of course, we can use this low and high and draw the retracement levels:

We can also use high and low from a bigger move, where the price moved back to the 38.2% retracement line. This is the same chart like the one above:

When we put these two Fibonacci levels together, we will see that some of them are very close to each other:

You can notice that the first convergence level was 38.2 (red) and 23.6 (blue), but the price did not stop there. The second level of convergence was at 61.8 (red) and 38.2 (blue). The price found strong support and from that point, the uptrend continued.

Fibonacci and zones

Zones, drawn correctly, are respected for the price most of the time.

Why zones are so important?

This is valuable information for us because thanks to them we know where to expect a reaction from the price. And where is a reaction from the price there is usually a swing and correction – a perfect place to go with the Fibonacci setup.

Many traders use zones to either take profit and close trades or entry a move which they hope will be to the next zone.

How to draw zones

It is easy to draw zones. It is similar to drawing a support resistance level with a trendline.

The difference is that you look for a little bit wider area:

It is best to start from weekly timeframe, look for zones here, move to daily and look for zones here and in the end move to the 4-hour timeframe and check if there are any zones you missed.

We use higher timeframes to locate zones, therefore, we have good chances that this will be important levels that other traders also see.

If you have trouble with drawing correct zones, this free guide over here is a great explanation – LINK.

How to use zones with Fibonacci
You look for two things which can happen near zones:

• price breakout through the zone
• price react with zone so that means that zone is working as a support/resistance for the price

Let’s have a closer look at each scenario.

Price breakout through the zone

In this case, zone did not stop price. We have a price on the other side but we do not enter yet. We wait for a pullback and potential retest of the zone. We place Fibonacci lines and the entry is on the retracement line.

It is best to use price action here. We want a confirmation from the price that the zone is working. For example, the zone was working as a resistance, failed, price broke through the zone. Now on the pullback, we want to see that zone is working as support. When we will have confirmation of that from the price we can enter a long position.

Below you can see a retest of the zone. Before this zone worked a few times as a resistance. Price managed to break through. Later, during a retest, zone started to work as a support. A good suggestion for us to look for a long position.

On another example, you can saw that zone worked as strong support. Eventually, price broke through it. In that are we could find some interesting Fibonacci setups like that one:

Price react with the zone (no breakout)

In this case, we look at the scenario where zone reacted as support or resistance. Next, we wait for the retest. Similar to the previous scenario, it is best to look for confirmation from the price itself that zone is working.

Here is a good example. Zone worked a few times as support and there was no breakout. You can see that we could find good Fibonacci setups when the price was bouncing back from that area.

A closer look below. Thanks to the zone we knew the direction of the trade we wanted to take. Zone worked as support before, we selected our AB swing, waited for correction and opened a long trade.

Stop loss would be placed on the other side of the zone.

Strategy – entry based on divergence

Very powerful one and one of my favorites. Divergence, especially on higher timeframes works in many cases and allows you to enter move early.

What is divergence? It is a situation when the oscillator is going in a different direction than a price itself. Let’s have a look at examples.

Price is making new highs, but oscillator is moving in the other way and makes new lows:

Price is making new lows, but oscillator is moving in the other way and makes new highs:

Sometimes divergence can be a start of reversal move.

On other times there will be only some small reaction from the price:

Does it always work?

No. Like any other indicator or system, you will see a situation when there will be no reaction from the price when divergence will occur.

On many times you will see that reaction and divergence is the first signal that there might be some stronger move in another direction.

The higher the timeframe, the more important divergence and better chances to work.

Which oscillator should I use?

From my experience, I would recommend using RSI which gives very solid divergence signals.
MACD is another good choice. As an indicator used to look for signals from crosses MACD is pretty laggy. When you use it to look for divergence, it is a different story.

But you can use oscillators like stochastic and others to look for divergence. You should check which works best for you.

How to trade it with Fibonacci?

In this part, we will have a look at how to use divergence and Fibonacci to open a trade. You can also use divergence to close a trade – I write about in another chapter about closing trades.

As always, we wait for a correction. In that area, we look for divergence.

I like to see some other confirmation, usually, this will be a confirmation from price pattern (bearish engulfing, dark cloud etc.) or break through the trend line.

Divergence by itself is not a signal. It is information that C point may be very near. That put us on alert and we can start to look for entry at this area.

Below you can see a daily usd/cad chart. During a correction, there was an RSI divergence which formed for many days. This was information for us that the 50% retracement line may be a place where buyers will try to take initiative.

In the next example, you can see divergence on RSI near 78.2% retracement line. There was also another divergence at the end of that move but about that later.

In this case, we could go long near 78.2% or we could wait for breakthrough trendline.

Another example of RSI divergence. During a correction up there was a divergence forming near the 38.2% retracement line. This was information for us that this might be a place to look for a signal to go short.

So pretty simple approach – you look for divergence near retracement line and place a trade after confirmation.

Another way to use divergence is to catch an initial move after a stronger swing. We are talking about counter trend so it is not for every trader. There are times that you see price approaching important Fibonacci Extension line like 161.8% or 200% – especially from bigger swings on higher timeframes and there is a divergence. This can mean that there is a possibility of a stronger counter move from here.

Are there any tools that can help me spot divergence?

Yes. Depend on your trading platform but you should check if there are scripts or indicators that can help you with that. Personally, I use RSI Divergence for Metatrader. You can set RSI period and other options:

When you add it you will have divergence marked on RSI itself and on the price:

You can find similar scripts in TradingView.

Remember, this is automated tools so there will be rare situations that they will show divergence which in fact is not. It is your job, in the end, verify if divergence is correct.

Strategy – entry measured with an extension on the correction

It is best to join it with price and candlestick patterns and trendlines.

The idea is simple – you look for an AB setup in the main trend. Then there is a correction. You try to predict where the correction will end with Fibo plotted on a swing in correction wave.

Let me explain. We have our standard setup with AB swing, we wait for the correction to the retracement line.

But which retracement will work as support?

We place another Fibo based on correction swing:

We look at extension lines, especially 161.8%, 200%, and 261.8%:

The confluence of extension with retracement is a bonus but not a must.

There should be some confirmation from the price that this extension line is working. We can also look for another confirmation like a break through the trendline etc.

If there is a confirmation that this extension line is working then it can mean that this is the end of correction and we can place our trade here.

First, it is very important to identify the direction of a trend. Below we can see that trend is up:

That way we may look for our entry. There was a correction down. We measure it with Fibonacci. In most cases, we wait for the price to reach 138.2% or 161.8%. Of course, we want to see a confirmation from the price before we open a position.

On the chart below you can see that long entry at 161.8% was a perfect place to open position.

To make it easier to spot this setup you can use zone which I showed you in another part. Zone gives us information about the current situation. On the chart below we can see that price is above the zone and the overall situation looks bullish. When the price is moving down towards the zone we can spot the ABCD pattern. Because we look for long opportunity, end of correction in the D point (which is a Fibonacci extension) is a great place to open an order.

Strategy – breakout entry

I used to trade typical breakouts more, nowadays I trade them very rarely. Still, there are times when markets are moving fast and you are left with this option.

When I write about typical breakouts, I mean breakout through recent low or high. I will cover other types of breakout later on so you have a better comparison.

Be careful with breakouts

I don’t like to trade typical breakouts because of two reasons:

• if you open trade at breakout then your risk-reward probably won’t be that good, you have much better RR ration when you enter near retracement line
• there are many traps for traders who place trades at breakout (fake breakouts etc.)

Still, there are times when the market is moving fast. In that case, when I trade breakout I wait for a pullback. This gives me a relatively good position to entry with decent RR ratio.

There are other types of breakout that I trade more. We are talking about breakouts from patterns, trendlines etc.

So in short, I do not recommend trading typical breakouts through recent high or low. Instead, try to find the best entries near retracement lines. Wait for confirmation like a breakout from a pattern or trend line. If you trade typical breakout then wait for a retest.

The main idea is to buy when the correction ends and there is a breakout. We are looking for a place where there is the best chance to enter at the right moment and in the right direction. The place is a break above recent high in an uptrend or below a recent low in a downtrend.

In theory, it should look like in the picture below:

The game plan is simple:

1. Identify the main trend (you can read the instruction in Part 7). You should know what the main trend is and in which direction you will be looking to enter a trade.
2. Identify the low-high/high-low swing. Find the swing which you will draw the retracement and extension lines for.
3. Wait for the end of the correction to part C. Let other traders play between the retracement lines. Just be ready and wait to enter the position.
4. Wait for the breakout above the high from swing A-B (to go long) or below the low from swing A-B (to go short).
5. Wait for a retest – usually, this will be a retest of B point. Switch to lower timeframe so you can enter on retest. For example, if you trade on the 1h timeframe, go to 5m or 15m and look for a retest here.
7. Open a trade.
8. Wait until the price hit the extension line and close the trade at point D

How Fibonacci levels help us here

There is one huge difference between a Fibonacci trader and an ordinary trader. The latter is not sure when he should close the trade opened after a breakout. He has opened the position at the right time (at the breakout), but he has no clue where to close it. He has some exit signals, but he is usually late with his exit decision.

A Fibonacci trader is able to get the most part of a move from the moment of the breakout. With the Fibonacci extension tool he can, on many occasions, exit almost exactly at the end of the move (it is not the goal of this Fibonacci trading strategy, but it will happen to you many times).

Your exit point will be at one of the extension lines (more about closing positions in the next part). Your goal is to catch most of the move between 100% and the extension line, so between 100% and 127% or 138.2% or 161.8% etc.

Breakout and retest – what is it about?

As I mentioned before, if you want to trade breakout it is best to wait for a retest. Here is why.

In this example, you can see a support line which worked a few times. Eventually, price managed to close below it (we had a breakout). Now, this is a crucial moment. Is this a false breakout or is this a moment when support turned into resistance?

That is why we wait for a retest. When there is a retest and we see that old support works now as a resistance (we see that based on price action) then it is a good place to open a trade with tight stop loss.

Remember, sometimes retest will be visible on lower time frames and that’s the reason why in this case it is a good idea to look for entry there.

W-M strategies

Reversal strategy. W and M patterns are a great place to use Fibonacci to open a trade.

First, let’s have a look at W and M patterns. As name states, they have the shape of W and M.

M pattern is a reversal pattern during an uptrend:

Same chart, but with marked M:

W pattern is a reversal pattern during a downtrend:

Same chart but with marked W:

Sometimes the second leg will be the same as the first one (and we will see the double top or double bottom). I treat double tops and double bottoms as M and W patterns but there may be different opinions about that.

On many times you will see that price won’t reach the level of the first leg. That means that the second leg will be shorter:

Before we move to the Fibonacci part, let’s have a closer look at the logic behind these patterns. We observe a strong move which started some time ago. Traders think that this move will continue. There is a correction, after that, we observe another leg forming.

Traders open a trade. This is a trap because price reverses and catch all these trades on the wrong side of the trade. In the end, this is a reversal and start of move in another direction.

How to spot these patterns? First, visually. They look like letters M and W. On many times second leg will be shorter than the first one.

This pattern tends to form near important support and resistance levels. For example, you see them forming near important R2/R3 or S2/S3 pivot lines or near important zones.

Below you can see a W pattern formed near S2 line:

If you see that price try to retest S or R levels, look for possible M and W patterns.

What about Fibonacci? We can use Fibonacci on the first swing in opposing direction:

And on next swings:

We look for entry as near retracement lines as possible. On many times there will be a signal from price action or breakthrough trendline:

In the example below, we can see a breakout from the W pattern, move to 50 average and correction (retest) to the red trendline. This was a good entry point in our ABC setup:

Stop loss is set usually behind recent high/low.

Our goal is to open a trade here with a good risk-reward ratio. As mentioned before, this pattern tends to form near important support or resistance levels.

Strategy – entry on a correction after trendline break

Strategy with the very good winning ratio. This is an example of a strategy where you use multiple timeframe analysis.

We have a few steps here.

First, based on higher timeframe, we want to localize the current move up or down. Sometimes it can be a move which can last for a few weeks or months, sometimes even longer. You know what we look for – a sequence of higher highs or lower lows. In many cases, with each this type of move we can draw trendline:

• for a move up, this will be a trendline working as a support
• for a move down, this will be a trendline working as a resistance

Here is an important part. You want to find trendlines with at least three touches from the price:

Only that trendline will be valid.

Also, remember that trendlines from higher timeframes are more important.

In the second step we wait for a breakout above that trendline.

On the chart, we can see a strong downtrend. In trends like this, it is usually easy to draw a trendline. At some point there was a breakout through that trendline:

We do not take the trade at the breakout.

In the third step, we wait for a pullback. Below is a closer look at the setup from above:

Sometimes it will be a pullback to the trendline, sometimes not. We use Fibonacci retracement at this moment so we place Fib levels on our breakout AB swing like that:

I prefer to wait for a deeper breakout like a breakout to the minimum 50% or 61.8% retracement line which gives me a better risk-reward ratio.
The entry is in the direction of the breakout so if the trend was down and breakout was up then you look for long opportunity.
You can confirm entry with your method of choice – price action, oscillator, break from the local pattern (all these were described in this guide).

I prefer a little wider stop, below A point. Sometimes price like to move in range after breakout (giving mixed signals) before it moves in the direction of the breakout.

As it comes to closing a trade, you can select from methods described later. I prefer to use partial close. My tip – pay attention to averages from higher timeframes. For example, if you trade it on the 1-hour timeframe, check the location of 50 average on 4-hour and 21 average on daily and 50 on daily. This will be first major tests for the price so if you see that there is a confluence of important Fibonacci Extensions like 161.8% and important average mentioned before then it might be a good place to take profit or most of it.

Close strategies

There are different ways to manage your trades. Personally, I use partial close (described later) but we will check also other types of taking profits and closing trades.

Two types of Fibonacci tools for finding possible targets

There are two similar tools to project where the move can end:

1. The Fibonacci Extension
2. The Fibonacci Expansion

I use mostly Fibonacci Extension, but it is good to know about both method so in the next part you can read more about Expansions before we move to close strategies.

Fibonacci Expansion explanation

Let’s start with the Fibonacci Expansion, which is based on three points. To draw it we have to identify swing low or swing high and the correction. Yes, it is exactly like it was with the retracements and looking for points A, B and C. We use the same ABC points. As you remember, we have to identify the swing and correction. Points A and B are marked at the swing ends, C is at the point where the correction ended.
How to draw the expansion levels?

In Metatrader, from the top menu select Insert → Fibonacci → Expansion. Run a trend line from point A to point B.

Next, you have to click on the end of the second line and move it to point C – where the correction ended.

Now you have the possible levels (projections) where the move may end or stop for a while. The three most popular are 61.8, 100 and 161.8.

Here, the move stopped at two points – the 100 and 161.8 expansion:

How is it calculated?

The expansion levels are drawn from point C:

• Target 61.8 is 0.618 times the distance between Points A and B
• Target 100 is 1.000 times the distance between Points A and B
• Target 161.8 is 1.618 times the distance between Points A and B

That is why in the above example the first target (61.8) is below point B. The correction was deep. The 61.8 target from point C ended below point B. Why? Because 0.618 distance between A and B ended at this place.

In another example, we will try to find the expansion in a downtrend. First, we need to make sure that the downtrend is strong, and then we wait for a swing AB and a correction to C.

We start by drawing the expansion from A to B:

Looking for Fibonacci expansion lines in a downtrend – first step.

Next, we move the second line to point C (where the correction ended):

The expansion levels are now drawn correctly. In this example, the price moved down to the 161.8 expansion, but as you can see after the next correction, the downtrend has continued. It was a great opportunity to use the expansion levels on the next waves of that move.

It gets easier when you practice it yourself. Remember, you have all this historical data to practice with.

Fibonacci Extension explanation

The Fibonacci extension is based on the first move (A to B). Point C is not used for calculation here.

The Fib levels are drawn from point B.

For example, the 138.2% extension level equals the 38.2% distance between A and B, which is drawn from point B. Look closely at the chart below, where I marked the distance:

For the 161.8% extension line, we take the 61.8% distance between A and B and add it to point B.

Now you can see that point C (where the correction ends) does not matter in the calculation. We only care about the swing from A to B and this is our base to calculate the extension lines.

It may seem that this method is less accurate because for the expansion we use 3 points. The truth is that it is also very accurate despite differences in calculation. Personally, this is my favorite way to look for the price projection and later in this guide I will mostly use this method.
Before we go further and learn more about the extensions, you may want to add them to your Metatrader chart. Look for instructions at the end of the guide.

This way you will be able to draw the retracement and extension at the same time! It is handy and saves you a lot of time.

The Fibonacci extension in practice

In the example below, you should be able to find points A and B. We can use them to draw the retracement levels as you remember from the previous chapter.

In this case, we do not pay attention to where exactly the correction ends. Point C will be somewhere between A and B, but in order, to calculate the extension, we need only A and B. This is what happened next:

The correction ended at the 78% retracement level and the price went down to the 127% extension line. It closed almost exactly at this Fib level and right after we noticed a very strong bounce up.

In another example, we can also spot a correction down to the 78% retracement. From here, price moved up strong up to the 138% extension where it stopped for a while. Later the price moved up to the 161.8% extension which was a very strong resistance for a long time.

Actually, the price did not move above that level and sellers took control.

Later I will present more examples of trades and signal confirmations. For now, it is important for you to understand the difference between the Fibonacci extension and expansion:

Expansion -> 3 points (ABC) to calculate the expansion levels
Extension -> 2 points (AB) to calculate the extension levels

Both tools are great. You can plan your exit points and book profits thanks to them. My favorite one is the Fibonacci extension, so in the next trade examples, I focus mostly on that tool.

Strategy – close at single extension

In most of my trades, I use partial close approach but there are times when I go with close at the single extension.

When to use this strategy?

If you see that there is a confluence of extension line and some important support/resistance zone or trend line then it is a good idea to simply take profits at this level.

Which extension lines work best

This is a common question, I answer it in separate chapter.

Strategy – partial close

Partial close is one of my favorite ways to manage a winning position. As the name suggest, you close your trade in parts.

The logic behind it is simple – you have potential profit targets – extension lines. Still, you never know which extension line which be the one where move ends. Yes, 161.8% is popular and work on many occasions but there are times when the move is stronger and it can reach 200% or even 261.8% extension.

This is where we can use partial close. We set to take profit targets at 2 or 3 extension lines.

Partial close – variant with 3 extensions

Personally, I use a combination of:

• 161.8%
• 200%
• runner or 261.8%

Some people prefer closer extension lines because the chances to hit them are better. So we have:

• 138.2%
• 161.8%
• runner or 200%

A nice example of it is in the next chart. Long entry after breaking above 50 average. Take profit targets were set to 138.2% extension, 161.8% extension and 200% extension. You can see that with the help of this tactic we managed to get most of the profit from that move.

Another scenario with the runner. You have some targets and you leave one part as a runner. In this example, we set take profit targets at 161.8% and 200% extensions. All were hit. At this moment we are left with one open position – this is our runner. We will keep it open as long as possible.

Partial close – variant with 2 extensions

It is a good idea to give a try to a variant with 2 extensions. This might be the most popular ones like:

• 138.2%
• 161.8%

or

• 161.8%
• 200%

or other.

Here is an example of close at 138.2% and 161.8% extensions:

Why it works

You can see that we set to take profit targets at most popular extensions. There will be times when only one of them will be hit. That’s fine. There will be trades when you hit your first, second and third take profit target and catch most of the move.

We use this approach because we never know how strong the move will be. Still, we have to take a profit at some point to be sure that we make money. So this is a classic fight between greed and logic. When you use multiple take profit targets you make sure that you will take profit and you will catch most of the move.

Below you can see a trade made by my trading robot. This script uses pivot points as multiple take profit targets (S1, S2, S3 and so on). You can see that it managed to catch most of the very strong move down and book profits from the early part of the move.

Your goal is never to catch the top or bottom when you try to close trade and take profit.

Your goal is to manage your trade that way that you take profit and you catch most of the move. Partial close with Fibonacci is a good way to do that.

Remember about breakeven

There is one more important factor which makes this strategy so great.

When your first take profit target is hit you move your stop loss to the entry point (breakeven). At this moment you have banked a profit and have open a trade running risk-free.

Of course, if you want you can move to stop loss to breakeven earlier – for example when the price is breaking above/below B point:

You can see on the example above that we took profit from partial close #1 and we were stopped out with 0 profit (breakeven) with the second part. So we had a profit and no loss.

How to close part of the trade

You have two ways to do that.

First – manually. In Metatrader right click on opened position and select option:

Next, change the type from ‘modify order’ to ‘market execution’:

With ‘market execution’ selected you may specify the volume you want to close and you can click the close button.

The second option – multiple positions. Open two or three trades instead of one. So if you plan to open 1 lot long on EUR/USD then you simply open three 0.33 trades. That gives you a sum of 1 lot and you can easily set take profit target at different extension lines for each part of the trade.

Strategy – close at retracement from bigger swing

Very powerful strategy. Even if you do not want to use it regularly in your trading, you should know it and remember about it. There are times when it can be very helpful.

What is it about?

Normally you select your take profit target based on extension line. I covered it in other chapters in this ebook. In many cases move will end at one of these extension lines.

But there is more to that. Price can also stop at retracement line from the bigger swing. How so?

Let’s have a look at an example. You trade long. You saw a higher highs patter, you go with Fibonacci setup and select extension line as target for your trade:

However, when you switch to higher timeframe, you can see that the main trend is down. That’s normal. You should remember that we can have different trends in different timeframes. I wrote about it here: Y.

Fibonacci setups from higher timeframes are more important than setups from lower timeframes. If the price is approaching important retracement – for example, 50% or 61.8% – based on bigger swing than it can work as support/resistance for the price.

You have two options here:

1. you look for a confluence of Fibo extension from lower timeframe with retracement from bigger swing (from that higher timeframe)
2. you simply set your take profit target based on retracement line from bigger swing (from higher timeframe)

Let’s have a look at an example. On this 4-hour eur/usd chart, we can easily see a strong downtrend. In the middle of February, there was a bounce and we took a long position here. Based on our swing, we had targeted at Fibonacci extension 161.8%. But what about that downtrend?

When we switch to daily timeframe we can see the whole move down. We can place retracement lines on that swing down zoom, you can see them in red. We also have our Fibonacci lines from 4-hour timeframe (blue ones). Can you see where this move ended? 61.8% retracement from the swing down was tested twice. If we were long with our setup from lower timeframe then we could use it as information to set a profit target. In that case, 200% extension was behind this red 61.8% retracement line so it was safer to set take profit target at 161.8% extension or simply at 61.8% retracement.

Just remember to check higher timeframes for retracement from bigger swings. That can help you to identify points where long term traders may take action.

Strategy – close with the help of divergence

We talked about the divergence in the section about opening a trade.

We can use divergence to close our trade. Remember, we don’t know in advance where the move will end. We use partial close to take most of the profits.

Still, if you see that there might be reversal then it may be best to close trade and book profits. Divergence can be a great help here.

Look at the example below. After a move up to the 138.2% extension, we saw a divergence on RSI. This was a warning sign that this might be the end of the move and the safest option is to close a trade and book profit. In the end, it was the best decision here because the price didn’t make it to the 161.8% extension or higher.

What is interesting, there was a divergence at the end of swing AB. This was information fo us that there might be a correction going on and we can use that swing for our Fibonacci setup.

Strategy – use CCI to close a runner

This is one of my favorite ways to keep most of the profits. We use divergence to do a similar thing. That’s the reason why I use CCI in my trading. It allows me to maximize profits from runners.

To use CCI as I showed you here it is best to go with longer settings such as 34 or 50.

Let’s see on the example what we’re looking for. First, let’s analyze the move down and behavior of CCI. When move down started, CCI was in the overbought area above 200 level. Next, it was going down as price was falling down. At the minimum, CCI reached more than -400 level. From that strongly oversold conditions CCI started to climb back (but notice that price at this point is still falling so we have a divergence here). Eventually, CCI crossed with -200 and later with -100. That moment – cross with -100 was the best moment to close a short position.

That way we were able to catch most of that move.

Another, similar example but with long position. Move up started when CCI was below -100. Next, price moved up together with CCI. At the peak, CCI reached over 431, from here it started to move down (notice that price is still moving up so we have a divergence). First, CCI crossed with 200, later with 100. This was our signal to close a trade. As you can see, it was almost the perfect place to take profit.

This is a simple but very powerful technique and it works many times like that. All you need is a strong, almost explosive move up or down. If you manage to open a position during this kind of move then with CCI you will be able to catch most of it.

Of course, normally we don’t know in advance if this will be such a strong move or not. That’s why we use partial close with Fibonacci and we left one part open as a runner. If the move will explode and we will have a runner open then we can use CCI to close it at the best moment.

Strategy – close with the help of the zone

I wrote more about the zone in the section about opening a trade. You can use it when you look for the best place to take profit.

As I mentioned – zone can work as support or resistance. If your Fibonacci extension line is near the zone then you can wait if there will be some reaction from the price. If the zone starts to work as support/resistance then it is best to take profit here.

On the example below, you can see some ABCD setups. In both cases point, D of our ABCD setup was in the zone and it was the best to close order.

Another example, with Fibonacci on the chart:

It doesn’t have to be exactly in the middle. You look at the zone as an area where there might be support. On the example below, you can see that price has found support little below 240 average.

Strategy – Fibonacci from the first swing

OK, so maybe it is not a big strategy but it is something important to remember about. This was a mistake I was making for a long time.

Situation – we have swings. We use them to trade with Fibonacci numbers. There is always that first swing which formed after trend changed direction:

In most cases, you will miss entry based on this swing because it was hard to spot. So you will use other swings to draw Fibo lines which are perfectly fine:

Still, it is a good practice to draw Fibo lines from that first swing. We look especially for important extension lines like 161.8%, 200%, 261.8%.

Below you can see a weekly chart of aud/usd. When we take Fibonacci from the first swing we have multiple extension as our target. In this case, 261.8% worked great as a target.

Another example – eur/usd daily timeframe. Again, 261.8% extension based on the first swing worked great. You can see that it took months for the price to get there and still this level worked very good.

Look for first swings especially from higher time frames like 4h, daily or weekly. Extension lines will be very important.

Which extension lines work best?

This is a common question. The answer is not that simple but I will try to explain this topic.

First, the question about the most effective extension

Simon, which extension has the best statistics? Which works best?

That would be simply the nearest extension lines. So we are talking about 127% or 138.2%. They are near the B point and because that short distance they will have better-hit statistic than let’s say 200% or 261%.

There is a trick. When you select this nearest extension lines as your profit target your Risk Reward ratio will be very low.

You can see my point here. In term of pure statistic, you have better chances that this 127% or 138.2% will be hit a little bit more often than 200% or 261%.

When you use them in real life, you will end with a low Risk Reward ratio.

Which extension lines give you the best Risk Reward ratio?

Extensions like 200%, 261% and so on.

But…

If you use only these extensions which are far away from entry then you hit your take profit targets only on rare occasions.

Most popular extensions

That’s why most popular extensions are the ones from the middle:

• 138.2%
• 161.8%
• 200%

Especially 138.2% and 161.8% are respected on many times by the price. Remember, sometimes move will not end at a specific extension but it can still work as support or resistance for some time.

About 200% and 261.8%

If you catch the stronger move and price manage to go beyond 138.2% and 161.8% then watch for 200% and 261.8% extensions. This is very important levels and in many cases move will end there or you may see a strong pullback. Of course, not in every case, some very strong trend moves can go through them and this is something we should always remember about. Still, on many times you will see that these 200% and 261% extension lines are very important for traders who simply take their profits here and open counter-trend trades.

Remember about timeframe

When you plan your take profit target, remember about higher timeframes. If you trade on the 1-hour timeframe, there may be a nice setup and you will place your take profit orders at 161.8% and 200%. That’s great but what about higher timeframes? On higher timeframes, we have bigger swings. With bigger swings, we have other Fibonacci setups. What if there is a 138.2% extension on the way from higher timeframe? Maybe there is a confluence or price will simply respect this extension from the bigger swing. I write about it in separate sections.

It comes with practice

So you can see, it is not that simple on first glance. It is not that complicates either. Simply remember about a few rules:

1. there is no such thing as one best working extension lines. Each extension line is important and can stop the price
2. select extension lines which give you good Risk Reward ratio
3. try to use partial close technique – that way you take profit at couple of extension lines and you don’t have to select single extension as your take profit target
4. check Fibo based on swings from higher timeframes – price like to respect extension lines from bigger swings
5. check Fibo based on the first swing from higher timeframe – I write about it in separate chapter

That way you will be able to select best extension lines to close your trade.

Strategy – close between A and B

Most of the section about closing trade is about strategies based on extension lines. In other words, we want to open a trade during a correction move and close it at D point:

There is one problem here – price needs to break through B point which usually is a stronger support/resistance for the price. Some traders like to take profits fast, especially if they opened a big position. They know that B point may stop the price so they decide to take profit at B.

There is nothing wrong with this approach. I use this approach, especially on bigger swings. When I see a retest of B point and price patterns that suggest a reversal move then I close my trade to protect my profit.

Management of risk, money, and trade

Breakeven

Breakeven can be very helpful to protect your trading capital. In this part, I will show you how to use it with Fibonacci.

What is it?

Breakeven means that you move your stop loss to the entry point. You do that when you have some profit running. Thanks to that your trade is risk-free.

Why is it good?

It is good for a few reasons. First, it is good for your trading account because you take less loses.

Another important advantage is that you do not keep losing trade running because you hope that price will turn around. There is a psychological aspect here – many people have trouble to close trade and take a loss. Especially when this trade was in profit before.

Another advantage – with a stop loss at breakeven you protect your trade from sudden moves. You know, the unexpected movement of because of some news or market manipulation. Thanks to the breakeven, you won’t be a victim.

Why it can be bad?

I’m not a fan of aggressive breakeven settings. There are people who like to set breakeven to fast. On paper, it still works because you protect your capital. In reality, you are missing some good, strong moves because you left to trade to early.

This is why it takes time to practice setting breakeven. Try a few different approaches and use the one which works best with your trading strategy.

When to set it – Fibonacci approach

You have to decide when there is a time to move stop loss to breakeven. With Fibonacci, it can be a moment when the price reached B point.

Sometimes we can see some noise and range move near retracement lines. When you managed to enter the trade at correct place (very near to the deep retracement line) then your stop loss is pretty small and you want to wait for this range. That way you do not want to exit a trade to fast.

Move beyond B point is a moment when the situation should be clear and you can move stop loss to the entry point.

When to set it – automatic approach

If you have trouble with remembering about moving your stop loss (like I do) then you can use simple scripts which will do it for you. For example, in Metatrader 4 you can use a script called BreakEvenExpert_v1 – you can download it for free here: https://forextradingstrategies4u.com/mt4-trailing-stop-ea/

Very simple script – you set pips value when stop loss should be moved to the breakeven. Remember to test values because it may be different in case of some brokers (check if you have 4 or 5 digits). If you want to set 30 pips as your value to set breakeven than you should specify 300 in setting options:

As I wrote, you have to test it and check with your broker. Other trading software should have similar scripts.

In my trading, I use usually automatic breakeven around 15-20 pips, but as I mentioned, you should test best settings for your trading plan.

How much risk per trade

Managing risk is the most important part of trading. Do it right and you will be a successful trader. Don’t follow risk management rules and you will never be the profitable constant basis.

In this chapter, I write about my experience with finding the best risk management rules. Other traders may have a different approach to this problem. For sure, risk management is not something that you will learn in one day. It takes time, trials and errors, to master managing risk you take.

The old 1% rule

You’ve heard that a lot. Risk no more than 1% of your trading capital. This rule is still valid. It doesn’t have to be 1%. It depends on your trading strategy. Some traders do feel comfortable with their strategy, they have a good winning ratio and because of that, they risk 2% or 3% of their capital. That’s still ok, but I do not recommend to take more risk than 2-3%. Later on, I will refer to that rule as 1% rule but keep in mind that this might be a slightly different number if you want.

Why 1% rule is so important?

It keeps you in the game longer, even when you will have a series of bad trades. It is simple math. When you follow 1% rule you can have many more failed trades before you zero your account so it is obvious why this rule helps you.

In real trading, you will have from time to time more winning trades. Sometimes you will have more losing trades. If you use 1% risk management then you will protect your capital through this losing streak.

What if you have more than 1 trade open?

1% rule is easy to explain when you have 1 trade open at the time. What about the situation when you usually have 2,3 or more trades open at the same time? How do you apply a 1% rule?

You should apply it to the whole trading capital. That means that you don’t want to risk more than 1% of your capital as a whole. Let’s say that you plan to open two trades. Then you should set the risk of 0,5% per trade. This way the whole risk you take will be 1% of your trading capital.

If you go with 1% per trade and you open 3 trades with 1% per trade at the same time then you are risking 3% of your trading capital.

I simplified the calculations above. Of course, when we take a closer look at how stop-loss situation can play out we can see that numbers will be slightly different.

How to follow your 1% (or other) rule

First and most important, learn how to calculate your risk. There are tools that can help you with that. For example, in the TradingView platform you can find a great tool which visualizes your risk vs reward:

If you are trading with Metatrader 4 then you can find few tools to calculate your risk reward. I recommend free tool Position Size Calculator, you can get it here:
https://www.earnforex.com/metatrader-indicators/Position-Size-Calculator/

This is a very powerful tool which shows much information that can help you to manage your risk. We have risk-reward for current trade and a suggestion for the size of the position. That’s a great help:

We also have a cumulative risk-reward for all positions.

If you are using another charting platform, look for similar tools.

How many trades at the same time

Depends on the instrument you are trading. For example, in Forex I usually do not have open more than 2 or 3 positions. Some people come to Forex trading from stock trading background. They try to diversify things. But do you really need diversification in Forex trading? Most pairs are euro or dollar crosses. Other usually are heavy connected to them. If dollar moves strongly because of some news then most of the pairs move more or less.

The problem is that on many times you will see rapid movements at the same time. It is hard to manage let’s say 5 or 7 opened positions if when suddenly all go against you.

So when it comes to Forex, less is better. Try not to have more than 2 or 3 positions opened at the same time.

When we talk about stock trading, it is a little bit different story. Usually, it is ok to have more positions opened at the same time. Still, it is a good idea to diversify them by selecting stocks from different sectors.

What leverage is right for you

Leverage can be a great thing… if you understand how to use it. For many traders, who don’t have big enough accounts, leverage is one of the main reason why they lose money.

For new traders, I would recommend leverage as low as possible. Many brokers give you the option to change leverage from the options panel:

Any leverage below 1:30 should be enough for new traders.

Correlations

It is important to understand correlations in trading. You don’t have to use them all the time but you should remember about them.

In this chapter, I will scratch only the surface on the topic. There are so many instruments and correlations between them that it is impossible to describe them all in one chapter.

Still, I will write about a few most important ones.

Check dollar index – DXY

If you trade Forex market, you want to keep an eye on dollar index – DXY. This is the index build based on all dollar pairs. Why is it so great? It gives you a picture of the current situation on the dollar. Normally you have a dollar in relation to other pairs – EUR/USD is a relation of euro to the dollar and so on.

With DXY the picture is much clearer.

Many brokers do not have DXY charts in their software. In that case, I recommend to use tradingview.com – you can find here the DXY chart. You can go with a free version, but you will be able to check only daily charts or higher.

Ok, but how you use it in practice? Basically, you look for a few things. First, is there a selloff on the dollar or maybe dollar is getting stronger? That can help you to decide in which direction trade on other dollar pairs.

The second thing is checking for important support and resistance levels.

When we see for example that dollar is in an uptrend but there is a strong resistance ahead then this is information how to trade other pairs (favor long setups on eur/usd and so on).

Third thing is to look for reversal and continuation patterns. When we see some reversal pattern like a double top, double bottom then we can expect a change of direction on dollar pairs and use it in our trading.

Check main index and index for your sector

If you trade stocks then you want to check the main index and index for your sector. For example, if you want to buy some stocks of energy company then you check the energy sector.

You don’t want to buy energy stocks if the whole sector is in a strong downtrend. Similar to the previous example, you do want to buy if you see that energy index is approaching a strong resistance or if there is a head and shoulder forming.

Negative correlations

Some correlations can be negative. That means that if one instrument is rising, the second – correlated one – is falling. That’s the case with USD/CAD and oil. Canada is one of the largest exporters of Oil to the USA. If oil prices are going up that means that Canadian dollar is getting stronger so USD/CAD is moving down.

Check for correlations of your instrument

You can trade stocks, indices, commodities, Forex pairs, and others. Just google “{your instrument} correlation” for example “usdcad correlation” and you will find more information about correlations you can find.

Backtesting your trading plan

Backtesting is very important if you want to be a successful trader. As you can see reading through this guide, there are many elements you can use to build your trading system.

You will use different entry rules when the market is trending strong and something else when the market is in the range. You have setups that you can use during reversals and so on.

We are talking about so many possible scenarios that you should know when applying trading rules in a specific situation. Some of your actions should be even automatic.

This is where backtesting comes with help.

With backtesting, you can teach yourself some automated behaviors. You can also check if your trading plan work.

There are a few ways to backtest your trading plan.

Paper backtesting

You place your trades on paper (or spreadsheet). This is not the perfect way to backtest, but for some quick check, it is the simplest one.

You can move your charts manually or you can use an option like rewind (available in TradingView).

Backtesting with dedicated tools

There are dedicated tools that can help you backtest your trading plan. For Metatrader 4 I recommend SoftFX Simulator – https://soft4fx.com/software/forex-simulator.php – which comes with free and premium versions. This is a great software which allows you to place trades on the chart.

Psychology and trading

Overtrading

Overtrading is one of the most dangerous things that await you when you start trading with real money. It is the mostly a psychological thing which is affecting your trading.

The most common reason for overtrading is a need of having a trade open.

You don’t have any trades open = you can’t earn any money

That’s a false logic which is very common amongst many traders. You close one trade and sometimes you force yourself to open another trade. Setup is not that great but you find arguments to open it anyway.

Even if you will have 5 great trades, you will have 10 or 20 wich didn’t work out.

Overtrading is also a reason why traders have a problem to earn money. I worked with many new traders who were not losing money, but they were not earning money either. Their balance was around 0. In most cases, they were guilty of overtrading.

How to fight with overtrading?

First, you should focus on the quality of your setups. Is it a setup that I want to take? Does it meat my minimal requirements?

Second, you should have a trading journal. It is hard to run it and it takes some self-discipline. Still, it is one of the best ways to avoid overtrading. If you overtrade and you add all your trades to the trading journal you will quickly notice the pattern.

Third tip. Do a weekly overview of your trading. On many times there is no time to make a summary at the end of the day. The situation is different on the weekends. Markets are closed, most likely you have some days off from your 9 to 5 day job. You have perfect conditions to analyze your trading record from last week. Look at each trade. Did you take it according to your trading plan or was it a trade taken because of emotions or greed? Thanks to this kind of overview you should quickly see if you are overtrading or not.

As you can see, overtrading is a problem that exists mostly inside your head. Because of that, there is no simple fix or solution. You have to check your trading results, analyze your trading record. You can see the solution here. You have to have a mentality of a trader, not a gambler. The trader knows why he opened a trade. Gambler is not able to say why.

Remember that overtrading is a serious issue. Let me repeat – I met so many traders who struggle to be profitable because of overtrading. You don’t have to have 5 trades open at the same time. A number of trades doesn’t mean a thing. Again, focus on the quality of your trades and you should see some big improvements in your results.

Mechanical trading

Probably your trading will be not 100% mechanical and that’s fine. Still, for most traders, it is best when their trading is as mechanical as possible or at least has some mechanical parts.

Mechanical? What does it mean?

It means that there is no room for interpretation. You need to have a specific signal and conditions to open a trade. It can be many different things.

For conditions it could be for example:

• price should be below or above average 200
• price should be below or above average 21 on higher timeframe
• MACD should be above 0
• and so on

So we are talking about requirements you need to even consider opening a trade.

For signals it could be something like:

• cross of Stochastic
• specific candle – pinbar, dark cloud and so on
• cross of price and moving average
• and so on

So we talk about a specific signal to open a trade.

You have to understand that you don’t have to use oscillators if you don’t want to. You can use other tools and analysis.

You should have all these conditions and signal written down. That’s your trading plan which you follow strictly.

Of course, there will be some room for interpretation. As I wrote a moment ago, your trading will not be 100% mechanical. If you can make 50% or 70% of your trading mechanical that will be great.

How does it help you to trade better? If some part of your trading is mechanical then it is easier to have consistent results.

Especially new traders like to overinterpret charts. If they want to open a long position they will find arguments to go long. That’s a wrong approach. Your plan should give you information about the trade direction, not your feelings or guts.

How to follow your risk and money management

I mentioned before some proven rules you should follow if you want to be successful as a trader. Again, you can have the greatest trading system in the world but if you won’t follow risk management you won’t make money.

The problem is that many traders know about those rules but they have a problem to follow them. There is no easy solution for that, but I have a few tips which can help you.

Leverage

People have a problem to follow 1% rule because they have access to the leverage. Sometimes it can be leveraged as big as 1:100 or 1:500. It is easy to calculate that even with only 200 dollars you can open quite big positions. That’s great but what about 1% risk per trade? Of course that 99,9% of traders who have huge leverage and small capital do not follow that rule.

That’s why you should consider lowering leverage on your account. Which leverage will be best for you? Depends if you are still learning how to trade, how big is your trading account. In my opinion, for new traders, the lower leverage is the better. We are talking about leverage as low as 1:5 or 1:10, eventually 1:20.

You may ask, how can you make money with such low leverage? Let’s be real here. As a new trader, you have almost no chances to make money. You have a long road ahead of you. Remember, you need capital to trade. With lower leverage, you will survive long enough to learn how to trade and to have some capital left.

Focus on your trading results in pips, not dollars. If you can earn a few hundreds of pips per month on a regular basis that you can consider increasing your leverage.

Account size

Another reason why traders do not follow their trading plan – too small account. They have a few hundred dollars, sometimes a few thousand. They want to make money fast to live like their idols from Instagram. They open big positions. Usually, it ends up in two ways – they lose all the money or they are oscillating around 0 profit (they have a big gain, next some bigger lose and so on).

If your account is small then focus on your trading skills. Build your trading plan, follow it. Learn.

In the meantime, work, save. Do whatever you can to get that money. Sometimes it takes time. That’s fine. When you add 10,000 hard-earned dollars to your account you will see that you follow risk management like a hawk.

Remember not to borrow money for trading.

I know that some people might not like this solution. Still, it is hard to find a better way. If you want to follow a 1% risk rule and you want to have some noticeable income from trading you need to have some money at your trading account.

Print or document each entry, do weekly or monthly overviews

I write more about it in the section about the trading journal. Documenting your trading really helps to check if you follow your risk rules and how strictly.

You can do weekly or monthly overviews. It is simple. You think that you follow your trading plan. During overview you see that’s maybe not necessarily a reality. You can see black on white if you followed your rules or not. Thanks to that you can make changes in your trading before next week or month.

How much time to spend on charts

We talked about overtrading. Overtrading in many cases is connected with time you spend in front of the chart. So if you trade on the 15-minutes timeframe and you sit in front of the screen 12 hours then you probably end taking up dozens of trade.

In contrast, when you trade on 4-hour timeframe or daily timeframe there will be days when you do not see any setup.

I said about it before but it should be said over and over again. You don’t have to be day trading and spending the whole day in front of the screen.

Have you hard saying: work smart, not hard?

It doesn’t matter if you are working hard when you aren’t working smart. The same applies to trade. It doesn’t matter if you spend the whole day looking at charts. Focus on longer, swing setups.

Setup alerts

Many people have jobs and other tasks. Besides, the market will move with or without you watching at the chart. Alerts will allow you to focus on other things. Many charting software allow you to set up many different alerts – from basic ones to more complex ones.

The most basic alerts you can set are based on the price level. You set the price level, if price reaches it then there is an alert.

There are more complex alerts. For example, if you wait for RSI divergence to occur you can use an indicator with built-in alerts. When there will be a divergence you get a notification.

There are many custom indicators with alerts.

Of course, you should do a proper analysis and know what conditions you want to open a trade. That way, when there will be an alert you know what to do. That’s the big advantage of alerts – preparation. You avoid trading based on hunch or emotions. You’ve done your analysis, wait for the price to reach a specific price to open a trade. And there is a bonus in the form of time you have to do other things.

Setup pending orders

They are a great help if you can’t or don’t want to be in front of the computer all the time. Maybe you have a day job, you have to go somewhere. Normally, you would miss some good entry. With pending order, you can open a trade.

Higher timeframe

Switching to higher timeframe gives you more time to analyze. It is harder to overtrade because you keep positions open for a longer time.

Just try to switch for a higher timeframe for some time. Test it for a few weeks or 1-2 months. Observe your results. Does it work for you?

What to avoid when you follow other traders

FOMO

FOMO – Fear Of Missing Out. This is an important psychological problem in trading. As the name says it, you are afraid of missing a great trade opportunity so you decide to open a trade. Usually, you act driven by emotions. There is greed involved. In those moments you don’t follow your trading plan.

The worst part is that you can follow your trading plan for most of the time. Still, there will be times when you see this one in one hundred years opportunity which you can’t miss and you open a trade.

It is not that tragic if you follow your risk rules, for example, if you risk 1% per trade. In that case, even this FOMO from time to time won’t ruin your trading account. In reality, when there is a FOMO you think that there is some special occasion to make money and you open too big positions. That’s end badly.

There is no simple solution for that. First, you have to be aware that you have such a problem. Next, you have to work on it. As I said, that’s a psychological thing.

Trading journal

You probably read many times about trading journal and reasons why it is so important. There is a reason for that.

It is not easy to run a trading journal. But… If you are disciplined enough to run a trading journal that means that you treat trading as a business.

If you treat trading as a business that means that you have much better chances to succeed as a trader.

The trading journal gives you much information that you lose otherwise if you don’t have one. You can analyze your trades, check which setups work best and which not so good.

Trading is a constant learning curve. It never ends. Markets, your trading account, political situation – it all changes and affect the way you trade. With a trading journal, you have better chances to learn lessons from the market the right way.
OK, but what’s the best way to run a trading journal? You should do it the way which is most convenient for you. Here are my suggestions for things you may want to try.

Paper version of the trading journal

First, you should have some ready form in advance. Keep things simple. Your form should have things like:

• the screen of the chart with entry
• comment about entry
• price of entry
• price of close
• result of trade
• comment about trade
• trade rating

Seems a lot but these are mostly short information and it takes few minutes to write them down.

In practice, it looks like this. You open a trade. Next, you make a screenshot. It is best when entry, stop loss and take profit targets are visible on the chart. This will make much easier to analyze the chart in the future.

In the commentary, section write few words why did you open this trade. It doesn’t have to be a novel. Just write down reasons why you opened this trade.

When trade is closed, go back to your notes and add result and final comment.

Also, rate your trade. You can give it a grade with stars. 5 stars – you followed your trading plan perfectly, 1 or 2 stars – you did not follow your plan. Remember, you are reviewing your setup and execution. Sometimes you will have a losing trade with 4 or 5 stars. As we already know, there is no perfect system and losing trades are part of trading.

An electronic version of the trading journal

If you don’t want to print each trade then you can keep it in the electronic version. You can use Google Drive to keep documents there or create them in Evernote.

Personally, I use Evernote. There is a free version with most options available. There is also a premium version which is rather cheap. This is a great tool which you can use on many devices. It helps you to keep your notes organized.

There is even an option to connect your notes with Google Drive document.

There are many ways you can use Evernote as your trading journal.
I have a specific notepad for each year.

Each year is divided in months (so one notepad in Evernote for each month).

Usually, I take between 10 and 30 trades per month. This approach makes it easy to review each month. if you take more trades, maybe weeks will be more ergonomic for you. As I mentioned, this is something you have to customize according to your needs and trading style.

Monthly and yearly summary

At the end of the month I do a summary of my trading in separate document. This documents contains thoughts about recent trading months, biggest mistakes and things that went well.

At the end of the year, I have all the data that I need. I can go back to each month, read a summary of my trading, I can go to a specific month and see all the trades that I took.

Remember why you have a trading journal

It all looks like a lot of work but it is not. Maybe when you start your trading journal it takes some time to write all things down. Later, it is simply a routine. Your notes should be short and to the point.

If you struggle to catalog your trades, just remember why you started your trading journal. You want to be a better trader so you can make more money. Each of us has different goals – to help the family, to achieve freedom, quit job etc. Becoming a successful trader is a process. It doesn’t happen in a moment when you wake up and suddenly you got it.

You know the statistics which say that only a small percentage of traders makes money.

You need to understand – odds are against you. Unless you are someone in the trillion born genius of trading, there is a lot of work ahead of you to beat these odds.

The road to profitable trading is long and hard. You should use any help that is available. Sure, books, courses, mentors – it all helps. In the end, it is you and the market and decisions you made.

A trading journal is sort of your trading black box. Sometimes it is hard to find out what you are doing wrong based on only one or two trades. But when you analyze all your trades and you manage to find a pattern, a thing that you make wrong time after time – this may improve your trading results a lot.

Taking breaks

You need to take breaks from trading, especially if you are trading on lower timeframes and you spend most of your time looking at charts.

Psychology is a crucial part of trading. As I wrote before, most traders look for the perfect system but they do not pay attention to the mental health and psychological aspects of trading. That’s a mistake. If you have problems when you trade with small amounts, think about the stress and problems you will have when you trade six-figure account.

As every professional who deals with stress on every day’s basis, you need to take some time off. A great example is Zinedine Zidane. He was Real Madrid’s coach and managed to win three champions league finals in a row. He was one of the most successful coaches in the world and after that winning strike, he decided to leave the club. He knew that he needed a break. Eventually, he returned to coaching and went back to the club after 10 months break. We may speculate where the club would be if he didn’t leave. Remember, it was his decision. He knew that a break from this job is something that he needs.

Of course, I’m not suggesting that you need to take a year-long break from trading. You have to decide if you need or want a break. If yes, how long? For some people, a few days or only one week will be enough. Others may need a few weeks or more than a month to rest. That’s totally fine.

When you need a reset – taking a break after series of loses

There is a good chance that you will have a series of bad trades. Maybe because of harsh trading conditions (political situation, range market etc.) or other reasons. Fact is a fact – you lost some serious money in a short period of time. Now you want to make it back – you probably heard term revenge trading. This is a very dangerous situation which can totally destroy your trading account. After a series of losing trades, your mental condition is not in the best shape. We are not talking here about greed or overtrading.

This is a serious state when your normal, rational thinking is switched off.

You lost money. You want it back. You want to punish the market.

In the end, in most cases market punishes you.

You need to reset your mind. Even a few days off, when you don’t think too much about trading and don’t look at charts can make a big difference.

Do you like to travel? Go for a weekend trip for your favorite town. Do you prefer to be alone? Rent some house by the lake.

There are plenty of ways to spend free time and disconnect from trading.

Talking longer breaks to stay healthy

Even if your trading is going well it is still a good idea to have some time off from the charts. It can be vacations or some shorter few-days-long breaks from trading.

Why breaks are so important

You need to understand why breaks are so important.

When you understand WHY it will be easier for you to plan some vacations or to take unplanned breaks when you need them (for example after a series of loses).

There are few answers to that question.

First, you gain a perspective. When you are trading each day, you focus mostly on one specific trade or few trades that are opened at a time. That’s totally normal. But there are times when you have to think about your trading in a broader picture. Is it working? Maybe you need to modify your trading plan? What about risk management?

There are always some smaller or bigger improvements you can make. They are hard to spot when you have open trades and you need to manage them. The situation looks different when you have a break from trading. No open positions, no need to check current charts. You can read through your trading journal and analyze your past trades. Trust me, you will always find something to improve. There is no better source to work on than your own trades.

Second, you simply rest from trading. It is a hard job. There are money and stress involved. Many people can’t handle that. You are not a machine that can operate on the same level for the full year. When you take a break, you simply can regenerate your batteries.

Third, if you make enough money from trading, you can enjoy life. That’s a good reminder why you put all that work and effort to be a trader. You are not a slave of charts. You use markets to make money so you can live a life you want. Nice vacations will be a good reminder of why you are in this game.

When to take breaks

Whenever you feel that you need to take a break.

If you need to schedule a vacation, there are some times when you can plan a break.

First, the obvious – Christmas period. You can easily take a break in the second half of December. Volatility is slow in that period and there is no point to waste that time to watch at charts. It is also a great time to review your trading year and to plan actions for the next.

Another good period to take a break – summer. Especially the end of summer – August. The pretty lazy period when it comes to trading action. You probably won’t miss a lot in that time.

Of course, do not feel a pressure to take breaks at specific periods. Remember, one or two weeks off won’t make that big difference in the long run.

Avoid social media noise

It takes time to learn how to trade, it takes time to grow your account. Most “traders” active on social media doesn’t talk about it. They present you a vision of fast success, money, cars, lavish lifestyle and freedom.

Trading is nothing like that. They are selling you dreams. You start to believe that it is possible to make fortune in trading penny stocks or Forex in short period of time so you can finally quit your 9 to 5 job.

That’s very dangerous thinking which can affect your trading results.

If you want to follow someone on social media then follow people who share some valuable information.

There is no point to follow some dude in the early 20s who is only posting pics of his sports car and some expensive gadgets or clothes. Of course, they always write that they post it to show you what’s possible to achieve and to inspire you. Think about it for a minute. If you need this kind of inspiration then I risk saying that you shouldn’t be trading. Most of these accounts are fake, they simply want to sell you some course. That’s it.

The worst part is that these accounts mess with your head. You need to stay focus and humble. There are no shortcuts to success in trading. There is a lot of hard work and dedication. To go through this you need to find other motivation than some random dude from Instagram who claims that he makes millions in Forex.

In the end

I hope that you’ve learned a few interesting things about trading with Fibonacci which you will be able to use in your trading. Sometimes it takes one or two new setups which can take your trading to the next level.

I presented you with many strategies. Each strategy can be a small part of your trading. You can include divergence, pivot points, price action and others in your trading plan. Markets are constantly changing and with more strategies, it is easier to find good setups.

I showed you strategies that I use with success in my trading. Remember that having a strategy is not everything. Money management is crucial – you have to learn to follow your risk management plan. This is a missing piece to becoming a successful trader.

I wish you all the best!

Simon David