### Indicators 101: How to Use Fibonacci Retracement

In this article, I’m going to show you how to apply Fibonacci retracement levels to a chart and what information it provides. Remember, indicators “indicate” possible price moves and entry-exit points. You’ll still need to interpret the data for yourself, so I’ll show you how to do that too.

## What is Fibonacci retracement

Let’s break down the words Fibonacci and retracement to better understand what this tool does.

Fibonacci was an Italian mathematician who discovered a sequence of numbers that occurs in nature. This infinite sequence is created by adding together the preceding two numbers on the list to create the next number. For example: 0, 1, 1, 2, 3, 5, 8, 13, 21, etc.

Retracement refers to how a price trend can sometimes temporarily fall back before continuing in the direction of the trend.

## Why is Fibonacci retracing so useful?

The Fibonacci Retracement tool helps traders identify levels for setting Buy Stop Limits or Sell Stop Limits that can activate orders whenever a price retracement occurs. The indicator lines also help when searching for a trading entry point level on a trending price move.

## How to set up Fibonacci levels

Open your Exness demo account and let’s apply the Fibonacci tool to a chart. EURGBP often displays volatility. It’s a perfect pair to demonstrate how the Fibonacci tool can help you set a more profitable order prior to a price retracement. On the top menu of your trading platform, set the timeframe to H4 (4 hourly) and display the price as a line.

Go to the top menu >> Insert >> Fibonacci >> Retracement

On the chart, draw a line at the start of a trend to the point of reversal by holding down the left mouse button until you get to the break.

If a retracement occurs, how low will it go? That’s where the yellow lines or levels can help with your forecasting. The displayed Fibonacci levels or lines offer several entry points. Assuming the trend continues, the higher the line value the greater the profit. These entry points levels can be customized, but most traders don’t mess with the defaults. So which level should you choose for your entry point?

## Fibonacci retracement entry points

In the example above, EURNZD started a bull run at 4:00 pm on March 26. A retracement began four hours later. The Fibonacci tool displays six levels ranging from 0.0 (no retracement) to 100.0 (full reversal). Choosing the right level is ultimately your decision, but the Fibonacci levels work as an effective guideline or benchmark. Just remember that an indicator is not a time machine and market prices don’t always follow the mathematical rules.

23.6: A small move that happens all the time and offers limited value or improved profitability.

38.2: An accurate forecast at this level creates attractive profits, and the likelihood of it occurring remains quite high.

50.0: Half retracement. Not a tall order by any means, but the improvement to your profit ratio improves significantly—compared to opening a position on the high.

61.8: Entering the realm of more and more unlikely. To catch such a reversal in the middle of a rally is a long shot, but highly profitable when it happens.

Most conservative traders will probably set entry levels between 23.6 and 50.0 but that number will rise as your knowledge and experience grows.

In the example above, the reversal dropped to the 38.2 mark and then continued to rally well beyond the price at the time of drawing the Fibonacci lines.

Remember, market prices won’t always fit in with Fibonacci levels so perfectly. Many unexpected changes can and will affect your orders if you trade on a daily basis. Most traders agree that the longer the timeframe and greater the price difference, the more accurate the forecast.

Trading indicator tools can be likened to comments on Amazon. You’ll get better results in the long-term if you take more than one into consideration, so work hard and use other indicators together with fundamental analysis.

Test the Fibonacci trading tool on a real or demo account

#### The Breakout Strategy

The Breakout Str

News traders trade off economic news release. The Forex market is particularly reactive to economic news, in particular, interest rate news from the G8 countries, as well as unemployment news for each corresponding country. News traders will have to bear in mind that the Forex market movements have already taken in to consideration existing and expected economic news. The sharp movements you see due to economic news are corrections due to unexpected news, either better than expected or worse than expected.

Another consideration to take to heart for potential news traders is that during negative sentiment news reports, currency movements generally head towards lower yielding and perceived safer currencies; USD and JPY in particular.

A good grasp of economics is generally recommended for traders wishing to start news releasing trading.

An economic news calendar is highly recommended. Forex Economic calendars show the release date for important economic news such as non-farm payroll, GDP figures and interest rate news. Below is an example of what an economic calendar shows:

ategy is the break out of a sideways trend. Usually, momentum is greatest on breakout points. A lot of traders take advantage of the breakout strategy when sideways moving prices break the upper or lower limits. Below represents a few breakouts following some periods of sideways tending.

### 3 More Economic Indicators You Need To Know

Forex indicators are crucial tools that can be used by all traders in order to improve to become more effective at what they do.

### 1. Bollinger Bands/Envelopes

Bollinger bands, also known as envelopes, were developed in the 1980s by John Bollinger to measure whether prices were high or low in relation to market volatility. Most traders use Bollinger bands to determine whether trend reversals are about to occur based on market volatility. Bollinger bands are made up of three bands with the middle band being the 20-period simple moving average of the currency pair. The values of the upper and lower bands are derived from the middle band (the upper band is calculated by adding two standard deviations from the middle while the lower band is calculated by subtracting two deviations from the middle). As a trader, you should stick to using the default values of the Bollinger bands as this is what most traders are using. Remember the price of a currency pair rarely strays far out of the Bollinger bands, which is why they are known as envelopes.

One of the most effective Bollinger bands trading strategies is the snapback to the middle band strategy, which is based on the fact that prices typically snap back to the middle band before heading in a specific direction.

### 2. The MACD Indicator

The term MACD indicator is an acronym for Moving Average Convergence Divergence indicator, which is a trend-following indicator used to measure momentum. Most traders use the MACD indicator to identify trend direction and to determine momentum and potential trend reversals The MACD indicator consists of the MACD line, the signal line and the MACD histogram. The MACD line and signal line move together although the MACD line is slightly faster than the signal line. As a trader, you can use the MACD indicator to generate trade signals, or to confirm trade signals generated by other trading strategies.

The average directional index (ADX) indicator is used by most traders to identify whether a currency pair is trending or not. The ADX indicator was developed and introduced into the markets by J. Welles Wilder in 1978. The ADX indicator is used by forex traders to measure the strength of a trend, to identify trends and ranges, and as a filter for different trading strategies.

The ADX indicator is made up of the ADX line, the positive directional indicator (+DI) line and the negative directional indicator (-DI) line. The ADX indicator is calibrated from 0 to 100 with values above 25 indicating a strong trend while values below 25 identify ranging markets. You can also use the ADX indicator to confirm trades from other strategies as well as its own trade signals.

### Conclusion

Tools like the Bollinger bands, MACD, and ADX can help you become a more effective trader and to make better trading decisions. While it is important to note that no indicator works all the time and to always apply proper risk management, learning about these three indicators is worth any new trader’s time.

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