Sequence of Fibonacci numbers is one of the most controversial tools in trading, which divided market participants into two opposing camps. Some investors completely trust Fibonacci magic numbers and always rely on them, while others are far apart from this opinion.
However, practice shows that the market participants use this indicator often enough and many strategies have been developed on the basis of this indicator. In this article, we will review one of such strategies, which is called Fibo limit trading.
The strategy is fairly simple, as it does not require any additional indicators or complex market analysis. A trader placed pending orders on trend and his/her main task is to define the completion of the corrective price movement and return of the price into trend.
Setout of indicators and levels
Fibonacci grid is included in the standard list of indicators on trading platforms. This indicator cannot be called a real indicator in full sense, as it does not give signals to open a trade; it just shows the key levels of support and resistance.
Some beginners find it difficult to stretch the grid. We know that it is built from the low of the price to a high or vice versa; but sometimes a trader has several options of stretching a grid.
Developers of Fibo limit trading strategy recommend traders to start with the determining of the global trend direction. They can use simple moving average with a period 85 for this. If this line is downwards and the price is above it, we deal with the downtrend and vice versa.
When the global trend is determined, we can start to stretch Fibonacci grid. In case of the downtrend, the grid shall be stretched from the last high of the price to the last low.
Principle of strategy
In Fibo limit trading strategy it is important to define the end of the corrective movement. Key levels in this strategy are 38.2 and 61.8 and pending orders will be placed on them.
If the downtrend goes below the level 38, a trader can place a pending sell order on this level. The same type of order is placed at the level of 61. One or both of these orders can be activated; stop loss for both trades is placed at the next level, which has the value of 80.
Default settings of Fibonacci grid may not have this level, so a trader has to install it. According to the theory of Fibonacci sequence numbers, the value of this level numbers is 78.6, so we need to specify this value in the settings.
It is considered that defining points for placing protective orders is the main difficult task in this strategy. If we use timeframes of one hour or higher, stop-loss level may be large distance away from the price and according to the money-management rules, take-profit orders will be placed twice as far.
A trader may not place take-profit orders at all and close trades manually, or use an option of trailing stop, which will transfer protective level in accordance with the price movement.