Fibonacci retracement tools are widely used by the trend traders. Those who are well experienced and know about the retail trading business, never trade against the major trend. If you intend to make a consistent profit without risking too much, a Fibonacci trading strategy is one of the most effective ways to trade the Forex market. But do you know the majority of the novice traders use the Fibonacci retracement tools in the wrong way? There are very articles that give you the perfect guideline to use the Fibonacci retracement tools.
Considering the mass popularity, we are going to give you the perfect guideline to use the Fibonacci retracement tools. Read this article carefully if you want to develop your skill as a trend trader.
The key retracement level
The naïve traders don’t know the importance of different retracement levels. On the contrary, the professional traders are always using the 50% and 61.8% retracement zone as their key retracement level. After testing these levels, price trends move in favor of the market trend. But never think the market will start its trending move right from this level. At times these levels are often broken and we as a trader experience the reversal.
Drawing the key retracement levels
Drawing the key retracement level is one of the most challenging tasks. If you fail to spot the key swings of the market, you are not going to get the perfect retracement zone. Most of the time the traders end up using the minor retracement level and loses money. Instead of trading with the real money open a Forex demo account and try to learn about the key swings of the market. To find the bullish retracement levels, draw the retracement level from the swing low to high. On the contrary, to find your bearish retracement level, draw it from the swing high to low.
Executions of the trade
The executions of the trade are fairly easy. You can set pending orders at the key retracement levels and most of the time you will win the trades. However, the elite class traders never use pending orders to trade the key retracement levels. They rely on price action signals. In the case of bullish retracement level, they look for bullish price action signals. On the contrary, bearish price action signals are required to execute trades at the bearish retracement levels. The 50% and 61.8% retracement levels are nothing but the key support and resistance level. These are the place when the price of a certain asset ends its correction. So, why do we need the price action signals? PA or price action signals are used to increase the probability of winning.
38.2% retracement level
We have just talked about the 50% and 38.2% retracement levels. But do you know the 38.2% retracement level is also used by the retail traders to execute the trade? Most of the time this level is traded by the aggressive traders. If you intend to trade this level, make sure you are relying on the fundamental data. Fundamental factors are powerful price driving catalyst. Without following the fundamental factors, it’s really hard to make some serious profit in the Forex market. Those who are completely new to the trading business should avoid trading the 38.2% retracement level. Once you get enough experience, start trading the minor retracement levels.
Limiting your risk factors
The Fibonacci trading strategy offers you precise signals. But never think you will always win. Losing trades are inevitable and you must be prepared to accept the losing trades. Many naïve traders often forget the fact, trading the market with high risk creates tremendous stress on the trader’s mind. And with stress, it’s very hard to make the perfect decision. So, reduce the risk by taking a 2% risk in each trade even though this strategy has a high success rate.