Forex Advice – Forex Systems

The markets are constantly moving in different directions. As a trader your making money when you are able to identify high probability zones where price will continue to move or reverse in the direction you anticipate. To assist in your accuracy you use various tools.

These tools may include moving averages, volume, overbought and oversold indicators and the like. For a select few, at the very top of the list of indicators is the Fibonacci tool-set. Not a replacement for anything you currently use, but a fantastic confidence builder when looking for low-risk entry.

I want to cover in this article how to use Fibonacci extensions and retracements. These are the most popular of the Fibonacci tools for use in trading stocks, options or forex. If you want more accuracy and precision these tools are absolutely critical.

Fibonacci retracements refer to a corrective wave, and extension refer to an impulse wave. Meaning with the Fibonacci retracement tool we are measuring where price will retrace to before resuming the previous trend, and with extensions we are measuring where price will make a new high or low beyond its most recent high or low.

Fibonacci retracements are retracing old territory. Let’s talk about Fibonacci retracements related to a bull market. Its simply the opposite for a bear market. Now when measuring a retracement what were looking for is where price will fall to before resuming the trend.

Keep in mind that the previous high = 100% of the move between the previous low and that high. So now we begin to measure the “corrective wave” and how much it will correct. Here are the most common and most accurate retracement levels:

* 23.6% – This level is first and represents the least amount of penetration into the impulse wave. It usually means BIG MOVE coming. * 38.2% – This is a nice level, it’s still shallow but represents a decent retrace and points to a BIG MOVE as well. * 50% – 50% is what we tend to anticipate when eyeballing a retracement. I would say that my biggest money-makers fall right between 50% and 61.8. * 61.8% – Generally anything beyond this and I’m out. In fact like I said previous, I’m a big fan of right smack between 50% and 61.8%. * 100% – If we hit 100% then it’s not likely we should be looking to get into the next impulse wave because it’s likely over. Time to re-think your stance.

Once we measure the low and the high a typical Fibonacci retracement tool will lay out the retracement levels starting with 23.6 and ending at 100%. This makes it easy to see the levels and wait and see what price does at these levels.

When price finds support at one of the retracement levels, and depending upon which level the next step is where do we exit? If price makes it beyond the original 100%, this is where we implement extensions.

You’ll notice when you lay down your retracements, extensions will automatically be laid out for you. So when price hits the 38.2% retracement level and reverses once it reaches the high its at 100% – Beyond that are extensions. The two most common extension levels are 161.8 and 261.8 %