Wednesday, February 16, 2011

Forex Fibonacci 50% Retracement Trading Strategy

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Trading the Fibonacci 50% Forex Entry Technique
50% retracements are one of the oldest and most consistent entry methods for traders of any financial market. These retracements work equally as well in the forex markets as they do in other markets; therefore, it is very important that you have a working knowledge of how to successfully implement this strategy into your trade setup arsenal. There are essentially 2 main ways that you can trade 50% retracements. The first involves entering at “limit” or essentially taking a blind entry near a 50% level, with no other solid confirmation. The second way is the more conservative approach which involves combining a 50% level with other entry signals; this is called trading with “confluence”, and is the most accurate way to trade the forex markets.
A note to everyone reading his before we get started; the Fibonacci 50% entry level is not exact, many times price will move to the Fibonacci 61.8% before reversing, sometimes it will fall a bit short of 50% before reversing. But generally speaking, most large moves retrace somewhere between 45-65% before resuming in the original direction. This is a general rule and not exact, each trading situation varies, it’s just something to keep in mind.
Trading off 50% retracement levels without confirmation.
(click chart to enlarge)



The above 4 hour chart of the GBPJPY shows a recent Fibonacci 50% forex trading strategy. This setup is what is called a “blind” entry at the 50% level. This is a more advanced entry technique and is only recommended for more experienced traders, but after a few solid months of screen time you can begin implementing this strategy if you so choose. The setup begins at point 1 in the chart; at this point price began to move higher and terminated at point 2. This movement from 1 to 2 is considered one move on the 4 hour chart, price than retraced down to point 3 exactly 50%. Once price began coming off from point 2 you would have anticipated a possible 50% retracement and then you would set an order to buy on limit near the 50% level. This strategy can work on any time frame and on any forex currency pair. Keep in mind this is a more advanced strategy and is a bit more risky than the 50% trading technique we will discuss next.
Trading off 50% levels with confirmation.
(click chart to enlarge)

In the chart below we can see an example of how to enter a Fibonacci 50% area with confirmation from a price action candlestick signal. Entering in this fashion adds a certain amount of “confirmation” to the direction you are entering. The candlestick signal in the chart below is known as a hammer or a pin bar reversal and they occur relatively often near 50% retracement levels. This is a more conservative way to trade the forex market because before you even enter the trade you have multiple factors or confluence of factors giving support to your entry decision.
The 50% forex entry technique is something that occurs with enough accuracy and prevalence in the forex market to make it a worth-while forex trading strategy for you to explore. Start plotting 50% levels on you charts and you will begin to notice how accurate they are. Remember that the more confluence you can add to the 50% retracement the higher its probability will become. Confluence can mean a support or resistance level in combination with a 50% level, or perhaps a convergence of moving averages at a 50% level in combination with a price action candlestick signal. The more confluence of signals at a 50% level the stronger it becomes. Add this forex strategy to your trading toolbox today.

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