Fibonacci Daily Chart Forex Strategy

Introduction

Sometimes, I get asked if there is no way to take a long term trade; enabling a trader to trade a few times in a month with the potential to make great returns? Well, this is the strategy to do the job, especially as many currencies are trending powerfully at this time of the year going into Q2 2015.

The goal of this strategy therefore is to:

  1. Identify these re-entry points.
  2. Identify a suitable exit area once the re-entry trade is in progress.

Indicators

Three indicators are used in executing this strategy:

  1. Fibonacci Retracement tool (for trade entry)
  2. Fibonacci Extension tool (for trade exit)
  3. Stochastics oscillator, which is set to values of 10,3,3 in the “parameters” field.

The Strategy

The strategy is exclusive to the daily chart. Using the Fibonaccci indicators, the strategy is designed to show traders how to re-enter into a long term trend when some degree of a retracement has occurred. In other words, this is a good trade to help the trader “buy on a dip” or “sell on a rally”.  This is a strategy which has a complete solution for entry and exit. All trades are picked out from the daily chart.

The key points are to pick out entry points from the Fibonacci retracement levels as well as the trade end zone from the Fibonacci extension tool. A daily chart is pulled up, and the trend of the currency pair is identified. If the trend is upwards, the Fibonacci retracement tool is plotted from the lowest point on the chart (swing low) to the highest point on the chart (swing high). If the trend is downwards, the sequence is reversed; swing high to swing low. Once this is done, the Fibonacci retracement levels are shown on the chart.

Next, the Stochastics oscillator which has been set to 10,3,3 in the “parameters” tab, is applied to the chart. The Stochastics oscillator has two lines which cross themselves from time to time. When these lines cross at a value of 20 or less, then the market is oversold and ripe for an upside move. When the lines cross at 80 or more, the market is overbought and a downside move is evident.

Why do we use the Stochastics oscillator? The Fibonacci retracement tool displays 5 levels of possible retracement. The question is: at which of these levels will price action resume in the direction of the previous trend after retracement? The oversold and overbought Stochastics levels will answer this question in the trade setups shown below.

To complete the trade, the Fibonacci extension tool is plotted as the retracement tool, with the difference being that the tool is extended to the exact retracement point. This shows the extension levels, which are actually the areas at which the price movement is expected to end.

1) Long Trade

Trace the Fibonacci retracement tool from the swing low to swing high on a daily chart. Plot the Stochastics oscillator. Look for where the price settles at a Fibonacci retracement level where the Stochastics oscillator is at oversold levels. Open the long trade at the open of the new candle.

Fibo_retrac

Long Trade setup

2) Short Trade

The short trade starts by tracing the Fibonacci retracement tool from the swing high to the swing low on the daily chart. The Stochastics indicator is applied to the chart, and we then look for where retracement price action falls on a Fibonacci retracement level when the Stochastics indicator is overbought (>80). Once this is identified, then the next step is to go short at the open of the next candle as displayed in the snapshot.

Fibo_retrac2

Short Trade setup

It is important to understand that because this is a daily chart, it will take 24 hours for a candle to form. So only enter at the open of the next day’s candle.

Stop Loss

Usually the stop loss can be placed just below the Fibonacci retracement level which marks the entry point for the long trade, or above the Fibo level which marks the trade entry for the short trade.

Take Profit

The Take Profit point is solely defined by the Fibonacci extension tool. The commonest extension levels seen on the chart are at the 61.8% or 100% Fibonacci extension levels. So the 61.8% level can be set as a first target. If price exceeds this point, then the trailing stop can be used to follow the price action to the 2nd target, which is usually at the 100% level. In extraordinary cases, the 161.8% Fibo extension level may also come to play when price movements are very aggressive.

Fibo_Exten

Using the Fibo Extension Tool for Taking Profit

We also show the setup for the short trade example we gave earlier. In this case, the 100% Fibo extension level was where the price action eventually got to. So the approach here would be to use a trailing stop once the price action has broken the 61.8% extension level, and chase the falling price action all the way to the 100% Fibo extension level.

Fibo_Exten2

Conclusion

Many governments are still running their market stimulus programs, so there are many opportunities to trade with this strategy, especially on the US Dollar pairs and the Yen crosses. The strategy must be practiced on a demo platform before being applied to a live account.

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