Forex Fibonacci Confluence
(Forex FX 4X, Fibonacci Trading Analysis Tutorial)
Before we look at Fibonacci confluence we will discuss basic Fibonacci levels and how these are typically used.
Forex/FX currency pairs often travel in rhythmic patterns. A secular trend is eventually followed by a corrective movement prior to another extended period of rising prices. Traders looking to enter the market on a retrace will sometimes utilise the “Fibonacci retrace” levels.
The Fibonacci retrace tool is included with most modern charting packages; the most popular Fibonacci sequence values used by forex/fx traders are usually 38.2% and 61.8% (the 50% level is also popular but not a Fibonacci ratio). A Fibonacci retrace value signifies the potential retrace of a financial asset’s original price movement.
The retrace entry technique is sometimes dismissed as being “of little value” by traders who say it is “not reliable enough”. However, the real power of Fibonacci entries can be found in the Fibonacci confluence areas where multiple levels coincide and fall closely together. We are looking for as many individual factors as possible which are positioned in the traders favor.
It’s not just a case of highlighting heavily confluent areas where retracements cluster; ideally the best confluence entry strategy will trade these areas when the price action is giving a directional bias – a “weight of evidence” - in terms of the trend or perhaps following from a breakout. When used like this confluence can give multiple reasons for entering a trade which meet together to give a common trading signal.
Fibonacci Confluence Example
Fibonacci retrace and extension levels are marked with horizontal lines. The chart below shows a cluster of Fibonacci levels; the 61.8% level is isolated but the FE100 (red), 38.2 (blue) and 50% (black) levels converge.
Which area do you think would most likely provide support or resistance with all else being equal? A single line or a confluence area?
“What is a Fibonacci extension?”
When a currency pair has a retrace deeper than 100% of the prior move we can use the Fibonacci extension tool. Fibonacci Extensions consist of horizontal levels drawn past the 100% level. The most common levels I see used for Fibonacci extensions are typically 1.618 and 1.272.
If this sounds complicated it really doesn’t need to be; let’s look at a chart example of the GBP/USD pair. It is often easier to visualize these things.
Fibonacci Confluence Chart
Let’s now look at a scenario where Fibonacci levels could appear in the same area on a forex chart. For example, the Fibonacci retrace of a large wave higher could have confluence with the extension of a corrective move lower.
The sterling/dollar chart below shows a bullish butterfly harmonic pattern. Don’t be too concerned by the butterfly pattern itself though. The purpose of me showing this particular chart is the fact that there is a strong confluence area.
- 1.272 Fibonacci extension
- 1.618 Fibonacci extension
- .382 Fibonacci retrace
Each of these values has been circled on the chart. They all point towards almost the exact point that price changed direction. Price will not always move over 500 pips higher after hitting the level almost to the pip, but it did on this occasion.
Is this a chart that I have searched hard for and saved for this post? No, this is the current GBP/USD weekly time frame chart. This is Fibonacci confluence.
How Do I Use Fibonacci Confluence?
If you can find these confluent levels and they are aligned with other areas of technical support or resistance they can be excellent areas to look for price action confirmation setups. I am referring to single or multiple candle setups like hammers, pinbars, price pivot areas, double bottoms/tops and the like.
It is my opinion that it is better for the bottom line of the trading account to wait for the confluence setups rather than taking every trading signal that comes along; trading like a sniper instead of wildly firing a machine gun shooting everything that moves (trading everything that moves and over-trading).
You may want to test these areas in conjunction with your current trading approach; go back over your recent trades and see if there is any value in filtering entries based on having Fibonacci confluence at the entry point. What about your exits? Have you left a trade running and not secured profits as price ran into a highly confluent area? It could be an interesting exercise.
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Related terms: Golden ratio, how to use fibonacci retracement in forex, fibonacci retracement levels, forex retracement strategy, fib retracement.