I am going to reveal a powerful fibonacci trading strategy that I learned many years ago. It combines structure analysis, fibonacci retracement and extension levels and candlestick analysis, and it is suitable for beginners.
Step 1
Find a trending market - the market that is trading in a bullish or in a bearish trend on a daily time frame.
AUDUSD is trading in a bullish trend on a daily.
Step 2
Execute structure analysis - identify key horizontal and vertical structures on a daily time frame.
Have a look at key structures that I spotted on AUDUSD.
Step 3
Draw fibonacci retracement levels.
Here are the important ratios you should look for: 382, 50, 618, 786.
In a bearish trend,
draw fibonacci retracement levels from the high of the trend to current low based on wicks.
In a bullish trend,
You should apply fibonacci retracement from the low of the trend to a current high based on wicks.
Take a look how I draw the retracement levels,
I took the low of the trend and the high of the trend.
Step 4
Find confluence.
Look for fibonacci numbers that match - lie within key structures that you identified.
Support 1 matches with 382 retracement.
Support 2 matches with 786 retracement.
Remove other ratios from the chart.
Step 5
Wait for a test of one of the fibonacci levels that match with key structure
The price perfectly tested 382 retracement level.
Step 6
Wait for a confirmation on a 4h time frame.
Our confirmation will be a formation of an engulfing candle - a strong candle that completely engulfs the entire range of a previous candle with its body. Learn More About Engulfing Candle
In a bearish trend, we will look for a formation of a bearish engulfing candle. Bearish engulfing candle indicates a strong selling pressure and the strength of the sellers.
In a bullish trend, we will look for a bullish engulfing candle. It indicates a strong buying reaction and imbalance.
Have a look at a bullish engulfing candle that was formed on AUDUSD on a 4H time frame after a test of 382 retracement.
Step 7
Open a trading position, set stop loss and choose the target.
After you spotted an engulfing candle, open a trading position.
Open short after a formation of a bearish engulfing candle and open long after a formation of a bullish engulfing candle.
If you sell, your safest stop loss will be 1.272 extension of the last bullish impulse on a 4H.
If you buy, your stop loss will be 1.272 extension of the last bearish impulse on a 4H.
In our example, our stop loss will be 1.272 extension of a bearish impulse leg on a 4H time frame. The extension is based on high and low of the impulse.
If you short, your take profit will be the closest key structure support on a daily.
If you buy, your take profit will be the closest key structure resistance on a daily.
Here is our take profit level.
Being applied properly, the strategy should generate 60%+ winning rate.
Always remember to check your reward to risk ratio before you open the trade. It should be at least 1.1/1.
Also, before you place a trade, always make sure that you trade WITH the trend and take only trend-following trades.
The strategy works perfectly on Forex, Gold, Silver, Oil, Indexes.
Good luck in your trading.
