How Do We Trade With Fibonacci Levels?

Before discussing this lesson, we need a prior understanding of support and resistance.
‘Fibonacci' refers to a tool that measures the size of a price move and then places support and resistance levels horizontally on a price chart.
The support and resistance levels are known as "Fibonacci levels."

These levels are used to make trading decisions in the usual way as normal horizontal support and resistance levels.

How To Set Up Fibonacci Retracement Levels In Meta Trader 4 (Or) Ami Broker Chart?

The beginning and the end of the price move in any direction can be identified.
The distance of that move can be measured by the Fibonacci tool
The Fibonacci tool will automatically place what is known as “Fibonacci retracement” and extension levels.
The calculations of the Fibonacci levels are based on the numbers in the Fibonacci sequence or the percentage difference between them.
Let’s discuss how to use this tool rather than consider its mathematics.
The Fibonacci tool is applied manually.

When Measuring A Downtrend:

Apply the tool at the beginning of the move to the end. It is applied from left to right.
The chart below depicts 38.2%, 50%, and 61.8%.
These are usually used even when other retracement levels have been found and work productively.

Number 1: The tool is drawn starting at the top
Number 2: The tool ends at the bottom, drawn from left to right
Number 1: 38.2% level
Number 2: 50.0% level
Number 3: 61.8% level

How Do We Select The Extension Level At Which To Take Profit?

To increase profitability, the extension levels can be matched to the corresponding retracement levels.

For instance, if the price retraced to the 38.2% retracement level, then the related extension level would be 138.2.

The Chart Below Is An Illustration Of Extension Levels In A Downtrend.

Strategy :1

Number A: 138.2% extension level

Number B: 161.8% extension level

Enter a position at one of the retracement levels when the price pulls back and then exit at one of the extension levels.

Strategy: 2

Number 1:  at 38.2% retracement level
Number 2: Corresponding extension level at 138.2%
The related extension to the 50.0 or 61.8 retracement level is 161.8.

Strategy :3

Number 3: Short entry at 50.0% retracement level
Number 4: Corresponding extension level at 161.8%

Uptrend Move:

The tool is applied from the bottom and ends at the top.

It is always applied from left to right.

The following chart depicts the same.

The following chart depicts the same.

Number 1: The tool is drawn starting at the bottom
Number 2: The tool ends at the top, drawn from left to right
Fibonacci levels are automatically placed in MT4 or AmiBroker Chart.

The chart above illustrates once the Fibonacci tool has been applied, it automatically places the Fibonacci levels between the start and the end of the move.
These levels are known as retracement levels.
The level that has been placed halfway between the start and the end of the move is the 50% retracement level.
When the price retraces halfway back, it is said to have retraced to the 50% level.
Based on the trend direction, it acts as support or resistance.
The most widely used levels that the price could retrace are 38.2%, 50%, and 61.8%.
The retracement levels indicate how far the pullback could be.
Fibonacci Retracement Levels Can Be Used For Entries
The chart below illustrates the Fibonacci tool being applied to an uptrend, and the 38.2%, 50%, and 61.8% levels were placed between the start and the end of the move.
We can use these levels for potential entries as the price could retrace back.

1. Potential long entry at 61.8%
2. Potential long entry at 50.0%
3. Potential long entry at 38.2%

Why Do Fibonacci Retracement And Extension Levels Correspond With Each Other?

Targeting a Fibonacci extension level is one of the techniques adopted by banks & financial institutions to take profit.
They will be anticipating other banks and traders to do the same.
There is no rigid rule, and there must be a confirmed trend even though extension levels work as self-fulfilling prophecies.
Using each level as a target
Exit when the price seems to find necessary support or resistance there.
It is considered a good exit if the price seems to have trouble breaking through a Fibonacci level.

Nut Shell:

An overview of the lesson discussed so far.

‘Fibonacci' refers to a tool that measures the size of a price move and then places support and resistance levels horizontally on a price chart.
The support and resistance levels are known as "Fibonacci levels."
These levels are used to make trading decisions in the usual way as normal horizontal support and resistance levels.
The Fibonacci tool is continuously applied from the left-hand side over to the right-hand side of the price chart,

for both long trades in an uptrend and short works in a downtrend.
The levels placed between the start and the end of the initial move are retracement levels, showing where the price could return.
The most common Fibonacci retracement levels are 38.2 %, 50%, and 61.8% and are commonly used for entries into the market.
Two methods can be adapted to select which retracement levels we can use to enter the market.
Aggressively enter as the price reaches each level.
Wait until the price finds support or resistance at these levels first, and then enter.
The most common extension levels are the 138.2% and 161.8% levels and are commonly used for exits out of the market.
Retracement levels and extension levels can correspond, with a retracement to the 38.2% usually on to the 138.2% and a retracement to the 50% and 61.8% usually on to the 161.8% level.