How to Trade a Fibonacci Day Trading Strategy

A Fibonacci day trading strategy uses the key Fibonacci numbers to show support and resistance levels and an RSI as confirmation of a sell of buy signal. One of the most important considerations for any day trader is where the support and resistance level lie on a price chart. Knowing he support and resistance levels helps traders know where the entry and exit points are. The Fibonacci retracement levels which are based on the Fibonacci numbers and the ‘golden ratio' have become a very important tool for day traders.

In the Fibonacci number sequence the ratio between two numbers is 0.618 and the ratio between the higher of the two numbers and the number below the next number down is 1.618. These two ratios are called the ‘golden ratio'. Therefore the two most important retracement levels for a day trader are 38.2% and 61.8%. Other important retracement percentages for traders are 50% and 75%.

How to Trade a Fibonacci Day Trading Strategy: All forex platforms have built in technical analysis tools so that there is no need for you to work out the ratios and percentages on your calculator it is all done for you. Currency pair's prices either trade in a tight range within a long term or short term trend before there is a breakout either in the direction of the trend or a reversal of the trend, or they trade on a price breakout.

The EUR/USD 30 minute chart below shows the Euro trending down from a breakout at the 1.3200 level on the 31st January. Notice that the Fibonacci retracement hasn't been set to the absolute high or low. You get better results if the Fibonacci is set to a double top or double bottom as in the example below.

The strategy for a day forex trader having confirmation from the RSI which is falling towards the oversold area would be to short the Euro. The downtrend continues beyond the key retracement levels of 61.8% and 38.2% before retracing from around the 25% level back to the 38.2% level. The day trader seeing the RSI showing an oversold condition at the 25% level would probably square the short position (red circle) and wait for the next entry signal. The entry signal is given when the price starts to retrace from 0% level (green circle) and the RSI bounces off the 30 oversold conditions. The day traders profit target should initially be at 38.2% but if as in this example the price continues to rise 50%, 61.8%, 75% or 100%.

The price ignores the first three levels before retracing from the 75% level back to the 50% level and then continuing the uptrend. The day trader should stay in the trade unless the price drops back through the 50% level or the 75% level and take profit at the 100% level. The day trader can also use Fibonacci retracement for a ranging market where the price does not fluctuate that much. The EUR/USD 30 minute chart below is showing a ranging price for the 1st, 2nd and 3rd of February.

A day trader should look for clear buy or sell signal. The clearest signals on this chart are the sell signal where the price retraces from the 75% strong resistance level (1st red circle) and the RSI is moving from an oversold condition to an overbought condition (1st green circle). The second clear entry signal is the buy signal (2nd red circle) where the price bounces off the 0% support level and retraces back to the 75% resistance level. The exit for the sell trade should be the price at the 0% support level and the exit for the buy trade at the 75% resistance level. Stop losses should be set one level below (buy) or above (sell) the entry level. Notice how strong the resistance level is at the 75% Fibonacci line.