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Retracement in Forex Trading

by with No Comment Forex

Learn Forex Trading

Author: Goldenrebate Team

Leonardo Fibonacci, an Italian mathematician from Pisa, is credited with introducing the Hindu-Arabic numeral system to Europe during the Middle Ages. In his book, Liber Abaci or ‘Book of Calculation’, he also introduced an influential sequence of figures which have come to be known as the Fibonacci numbers.

The relationship between the numbers in this sequence (i.e. the ratio) is not just interesting on a theoretical level. It appears frequently around us in the physical world and is integral for maintaining balance in nature and architecture. It is also important in the financial markets; many traders use Fibonacci ratios to calculate support and resistance levels in their forex trading strategies.

What is the Fibonacci sequence?

Each number in the Fibonacci sequence is calculated by adding together the two previous numbers.

1 1 2 3 5 8 13 21 34 55 89 144 233 377 …and so on to infinity

What is significant about this pattern, however, is that the ratio of any number to the next one in the sequence tends to be 0.618.

Furthermore, the ratio of any number to the number two places ahead in the sequence is always 0.382.

 
 

Similarly, the ratio of any number to the number three places ahead tends to be 0.236.

 

These ratios are commonly known as Fibonacci ratios.

Dividing these Fibonacci ratios will result in either 0.618 or 0.382:

How Fibonacci retracement works

In trading, these ratios are also known as retracement levels. Traders wait for prices to approach these Fibonacci levels and act according to their strategy. Usually, they look for a reversal signal on these widely watched retracement levels before opening their positions. The most commonly used of the three levels is the 0.618 – the inverse of the golden ratio (1.618), denoted in mathematics by the Greek letter φ.
To identify retracements accurately, you need to read charts well — see our guide on Reading Forex Charts Like a Pro.

How to draw Fibonacci retracement levels

Drawing Fibonacci retracement levels is a simple three-step process:

In an uptrend:

Step 1 – Identify the direction of the market: uptrendStep 2 – Attach the Fibonacci retracement tool on the bottom and drag it to the right, all the way to the topStep 3 – Monitor the three potential support levels: 0.236, 0.382 and 0.618

In a downtrend:

Step 1 – Identify the direction of the market: downtrendStep 2 – Attach the Fibonacci retracement tool on the top and drag it to the right, all the way to the bottomStep 3 – Monitor the three potential resistance levels: 0.236, 0.382 and 0.618

Of course, it is more reliable to look for a confluence of signals (i.e. more reasons to take action on a position). Don’t fall into the trap of assuming that just because the price reached a Fibonacci level the market will automatically reverse.

Combine Fibonacci levels with Japanese Candlestick patterns, Oscillators and Indicators for a stronger signal. As you can see in the chart below, the “Three White Soldiers” pattern is confirmed by the fact that prices are trading above the Moving Average line, and additionally that the MACD (Moving Average/Convergence Divergence) is above the zero line.Combine Fibonacci retracement with momentum indicators for better accuracy — learn how in our article on How to Use the RSI Indicator in Forex Trading.

Trading using Fibonacci retracements

Every trader, especially beginners, dreams of mastering the Fibonacci theory. A lot of traders use it to identify potential support and resistance levels on a price chart which suggests reversal is likely. Many enter the market just because the price has reached one of the Fibonacci ratios on the chart. That is not enough! It is better to look for more signals before entering the market, such as reversal Japanese Candlestick formations or Oscillators crossing the base line or even a Moving Average confirming your decision.
Want to see retracement strategies in action? Open a free Exness demo account and test them with no risk.

 

Frequently Asked Questions

Q: What is a retracement in forex trading?
A retracement is a temporary price pullback against the main trend before the trend continues in its original direction. Think of it as “two steps forward, one step back.” Retracements are normal and healthy — they give traders better entry points into existing trends.

Q: What is the difference between a retracement and a reversal?
A retracement is a short-term pullback that continues within the existing trend. A reversal is a permanent change in trend direction. The key difference is duration — retracements are temporary, reversals are long-term. Waiting for confirmation before entering helps you avoid confusing the two.

Q: What are the most important Fibonacci retracement levels?
The three most widely used levels are 38.2%, 50%, and 61.8%. The 61.8% level — known as the Golden Ratio — is considered the strongest. Price most often finds support or resistance at these levels before continuing in the trend direction.

Q: How do I draw Fibonacci retracement levels on MT4?
In MT4, select the Fibonacci Retracement tool from the toolbar. For an uptrend, click on the swing low and drag to the swing high. For a downtrend, click on the swing high and drag to the swing low. MT4 will automatically draw the key levels on your chart.

Q: Can Fibonacci retracement levels be used on any timeframe?
Yes. Fibonacci retracement levels work on all timeframes — from 5-minute charts to monthly charts. However, levels drawn on higher timeframes (daily, weekly) carry more weight and are more reliable than those on lower timeframes.

Q: How do I practice using Fibonacci retracement without risking money?
Open a free Exness demo account and practice drawing Fibonacci levels on MT4 with real market data. Open your free Exness demo account here.

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3 More Economic Indicators You Need To Know

by with No Comment Forex

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.

3. The ADX Indicator

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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How To Use The Parabolic SAR In Forex Trading

by with No Comment Forex

By GoldenRebate Team

Have you ever wished you could tell when a trend in the forex market was likely to stop and reverse? The Parabolic Stop and Reverse (SAR) is an indicator designed to do just that. In this post, we’ll explore the Parabolic SAR and teach you how to use it.

How The Parabolic SAR Works

The Parabolic SAR typically plots dots or points on a currency pair’s chart that indicate potential areas where price action might reverse.

When a forex chart is in an uptrend, the dots plotted by the Parabolic SAR are typically below the candles. When the currency pair is in a downtrend, the reverse is true. The dots usually appear close together whenever the trend is consolidating, while they are further apart in a strong uptrend or downtrend.

Note: The Parabolic SAR only works in trending markets. Do not use it in choppy or sideways markets — these conditions typically generate a lot of false signals.

How To Enter And Exit Trades Using The Parabolic SAR

You can use the Parabolic SAR to time your entries and exits when a trend is about to reverse. For example, when a major uptrend is about to reverse, the Parabolic SAR will typically form at least three dots above the candles to indicate that a downtrend may be beginning. In such a case, you should exit your long trade and enter a short trade.

In cases where the prevailing trend is a downtrend, the Parabolic SAR will typically form at least three dots below the candles to indicate that an uptrend may be about to begin. In such a case, you should exit your short trade and enter a long trade.

Using The Parabolic SAR As A Trailing Stop

Some traders prefer to place their trailing stop loss orders at the level where a SAR dot appears within an established trend. In most cases, this approach will rarely stop you out in a market with a strong uptrend or downtrend, but will provide protection if the trend unexpectedly reverses. This can be a particularly useful feature for new traders who aren’t yet familiar with setting trailing stop losses.

Note: This does not work in ranging markets where the SAR typically whipsaws between positions.

Adjusting The Step (Acceleration Factor)

The sensitivity of the Parabolic SAR is determined by the Acceleration Factor (AF), also known as the Step. The default acceleration factor is 0.02, but most charting programs allow you to adjust this figure.

  • Lower the step → moves SAR further from price → fewer signals, less sensitivity
  • Raise the step → moves SAR closer to price → more signals, more sensitivity

The step has a minimum value of 0.01 and a maximum value of 0.20. When adding the Parabolic SAR to a chart, two values are required: the step and the maximum step. The step value carries more weight in determining reversals.

Conclusion

The Parabolic SAR was originally designed to analyse trends lasting two to three weeks. However, it can be used on trends of any duration. We recommend experimenting with different values for the step and maximum step to identify the settings that allow you to ride a trend for the longest period.

Combine the Parabolic SAR with the Exness cashback rebate program to earn money back on every trade you make — whether you’re riding a trend or managing a reversal.

Ready to test the Parabolic SAR in live markets? Open your free Exness account today and start trading with one of the world’s most trusted forex brokers.

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Frequently Asked Questions (FAQ)

What is the Parabolic SAR indicator?

The Parabolic SAR (Stop and Reverse) is a trend-following indicator developed by J. Welles Wilder. It plots dots above or below price candles to indicate the direction of the trend and potential reversal points.

How do I read Parabolic SAR signals?

When the dots appear below the price candles, the market is in an uptrend and you should look for buying opportunities. When the dots appear above the price candles, the market is in a downtrend and you should look for selling opportunities.

What is the best setting for Parabolic SAR?

The default settings are a Step (Acceleration Factor) of 0.02 and a Maximum Step of 0.20. These work well for most traders. Lower the step for fewer but more reliable signals, or raise it for more frequent signals.

Can Parabolic SAR be used for stop loss?

Yes. Many traders use the Parabolic SAR as a trailing stop loss by placing their stop at the level of the most recent SAR dot. This helps lock in profits as the trend continues while protecting against unexpected reversals.

What are the limitations of Parabolic SAR?

The Parabolic SAR performs poorly in sideways or choppy markets and generates many false signals. It works best in strongly trending markets and should always be combined with another indicator such as ADX or RSI to confirm trend strength.

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Bitcoin Technology: Under the Hood

by with No Comment Forex

Learn Forex Trading

Author: Goldenrebate Team

In 2008, Satoshi Nakamoto proposed a peer-to-peer cash payment system that would allow people to transact directly with each other, without the need of financial institutions. Since then a lot has been said and written about bitcoin, the new digital currency. The purpose of this article is to shed some light on the jargon surrounding the technology and, more specifically, the computer network that facilitates the payment system.In computer networks there are usually two main models: client/server and peer-to-peer. The difference is the role and functionality of each participating computer (or node, as it is usually called).

Client/Server

In a client/server model, there are two discrete entities; the server and the clients. This is a centralized environment where the applications, files and other resources are stored on a central computer – the server. The server acts as a central authority that provides services to the rest of the nodes in the network. It shares information and resources with the clients. All clients are connected to the central server. This model is prone to security breaches, hacks and breakdowns as the server constitutes a single point of failure. If the server is faulty, it can bring the whole network down.

Peer-to-Peer (P2P)

On the other hand, a peer-to-peer network is a decentralized model – in other words, there is no central authority or server. Instead, each node acts as both server and client, where all nodes are equal. BitTorrent is perhaps one of the most popular P2P networks for file sharing. While peers are vulnerable to security attacks (which the Bitcoin network takes care of through its protocols), the advantage is that scalability is easy. A new computer may be plugged into the network and be up and running once in sync with the network.

As the network expands, its computational power expands as well. Furthermore, a faulty computer will not jeopardize the integrity of the network. All computers are interconnected and communicate with each other constantly – this way, the propagation of messages continue uninterrupted. This is perhaps the greatest advantage P2P has – it’s a fault tolerant network.

Distributed System

The Bitcoin network follows a distributed application model, where the work load is spread among the participating nodes. When “digging” into computer networks, one will come across the Byzantine Generals Problem where consensus is the goal. In order to maintain reliability in the network, consensus must be reached among the participating computers. 100% consensus is, of course, ideal but not always feasible.

Byzantine Generals Problem

A group of Generals have surrounded an enemy city. They have to attack or retreat based on the Commanding General’s orders. It is imperative for the success of the campaign that there exists consensus among the Generals. Messages are passed from the Commanding General to the Generals through unsecure and penetrable networks. Even worse, a number of the Generals and/or even the Commanding General himself may be traitorous. As long as the Commander is loyal and the number of traitors is not greater than one third of the Generals, then consensus may be reached to attack or retreat at the same time.

In a nutshell, there must be 3t + 1 Generals where t represents the number of traitors.

It is obvious that General 1 will receive contradictory information from the Commander and General 2, who happens to be a traitor. In this scenario, it is not possible to achieve consensus (which is more than 50% in favor of attack or retreat).

The Bitcoin system faces the same type of problems as the Byzantine Generals. In order to bypass it, Satoshi Nakamoto introduced the proof-of-work concept. When sending a message, the message is hashed and a nonce is sent to all nodes to verify the proof-of-work. Every message (i.e. block) is chained and as a result it is close to impossible to tamper with it.

Conclusion

Bitcoin follows a decentralized, peer-to-peer networking and distribution model. Consensus is needed among the nodes to ensure smooth operation of the network. A number of “bad” nodes are not capable of altering the blockchain due to the implementation of proof-of-work.

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