This trading strategy is based on the levels of correction drawn with Fibonacci tool. Best timeframe is H4; recommended pair is EUR/USD. Other instrument can be analyzed with Fibonacci retracements too, although the performance of the tool should be checked on the chart beforehand to find the most reliable level of correction.
First of all a trader should choose the beginning of the ascending or descending movement, and then connect two points of the trendline. Fibonacci lines will be drawn automatically.
The lines are drawn in accordance with Fibonacci sequence. Each number is approximately 1.618 times greater than the preceding one, and each number makes approximately 0.618 of the successive one. After strong upward/downward movement the pair EUR/USD tends to retrace to the levels of 38.2% and 50.0%. This aspect can be used in trading strategies.
Fibonacci tool can be used with additional technical indicators, for example, Envelopes. If the price chart crosses one of the Envelopes lines from above, “bearish” trend is getting stronger; once the price chart crosses one of the Envelopes lines from below, we got a signal to buy.
On the chart above a trader opens short positions as soon as price chart crosses the upper Envelopes line and then exit the market at 50.0% of Fibonacci lines, taking profit of 80-90 points.
“Stop Loss” orders should be placed above the high of the ascending trend and below the low of the descending one. Trailing Stop tool can also be applied as soon as trade enters break-even zone.