Fibonacci indicator is a very popular tool among technical traders and is based on the key numbers identified by mathematician Leonardo Fibonacci in the thirteenth century. However, Fibonacci’s sequence of numbers is not as important as the mathematical relationships, expressed as ratios, between the numbers in the series. In technical analysis, Fibonacci indicator is created by taking two extreme points (usually a major peak and trough) on a stock chart and dividing the vertical distance by the key Fibonacci ratios of 23.6%, 38.2%, 50%, 61.8% and 100%. Once these levels are identified, horizontal lines are drawn and used to identify possible support and resistance levels. Before we can understand why these ratios were chosen, we need to have a better understanding of the Fibonacci number series.
fibonacci indicator for metatrader
Fibonacci indicator is specially built for metatrader forex platform. It is very easy to use. Developers made it in a very user friendly way. If you want to explore deeply and want to understand how it works you can go through the articles below.
Fibonacci indicator in Forex
Straight to the point:
Fibonacci Retracement Levels are:
0.382, 0.500, 0.618 — three the most important levels
Fibonacci retracement levels are used as support and resistance levels.
Fibonacci Extension Levels are:
0.618, 1.000, 1.618 — three the most important levels
Fibonacci extension levels are used as profit taking levels.
So, what we will learn today is how to apply Fibonacci indicator and how to interpret results that we see on the screen.
To set up Fibonacci indicator on the chart we need to find out:
1. Is it uptrend or downtrend?
2. Highest and lowest swings in the chart formation (A, B points).
And go with the trend!
So, click on Fibonacci indicator from trading platform that you use. Now, as shown on the Figure 1:
We have an uptrend. A — our lowest swing, B — our highest swing. So, we will look to BUY some lots at the good lowest price and go up with the trend.
Click on A and drag your cursor to B, click. There you go! You must see different lines appeared on your chart. Those lines are called Fibonacci Retracement and Extension Levels.
So, what we are expecting is next: the price should retrace (go down) from point B to some point C, and then continue up in the direction of the trend.
Those three dotted lines (0.618, 0.500, 0.382) at the bottom on our picture shows three Fibonacci retracement levels where we expect the price to take a U-turn and go up again. There we will place our BUY order.
The best situation would be to buy at the lowest level — 0.618 — point C. And on practice the price usually gives us this chance. However, 0.500 is also a good level to place a BUY order.
Well, let’s take a look at the progress.
The price has successfully reached the lowest 0.618 point and made a U-turn.
So, now when we have our BUY order placed at desired point C, we would like to set some targets to take our profit in the future. For profit taking levels we use Fibonacci extension levels (0.618, 1.000, 1.618). The most common is 0.618 extension level, but when the price shows good potential to reach next 1.000 or even 1.618 level, you can leave your trade to get that target too.
We will choose 0.618 extension level as our profit target, and according to Figure 2, D is our point for taking profit.
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