How to use Fibs

[rcgreg]

Normie Newguy here, I've been trying to learn how to use the Fib's correctly and the more I read, the more grey hairs I get - and darn it - I have enough of those already!! I use MigFx as my trader - and their supplied trading terminal and charts. I'm not sure, but I get the impression that using Fib's is somewhat dependent upon the charts and terminal software you have - is that so?
If anyone has a good link - or actually used this trader and chart setup with Fib's I'd really appreciate some practical advice on Fib use before the grey hair becomes no hair !
Thanks and happy trading to all.

[Pipcrawler]

I think you will have less gray hairs once your realize using any indicator or tool, especially by themselves, is subjective. They are nothing more than different calculations of the same thing: price action.

In my view, the fibonacci retracement tool can be even more subject because you as the user, must pick the swing high and swing low. In trending markets this task may be more obvious than in the range bound markets. Also, the definition of a swing high/low will probably differ from one trader to another.

With that said, I love using fibonacci's and I think it is a very powerful tool for the way I use it.

First, I view the area from 38% to 61% as a potential S&R zone and reversal area. While I've seen it time and time again, certain levels can turn the market around, but I do not like to base my entire position on one level.

Then I ask myself a few questions:

Is the pair trending or ranging?
What is the overall sentiment on each currency?
Have the fundamentals changed or not?
Are the levels lining up with psychologically significant levels such as '00 and '50?
Was the recent swing move fast or slow?

With questions like these I determine the probability of a profitable trade and if its worth the risk. And that's basically how I view Fibonaccis.

One last thing, I bold "probability" to make one last point that may save you, and hopefully others, a few gray hairs ... The day you realize and accept that there are no certainties in this business and in the markets, and when you build your strategies and money management system around that idea, is the day you begin your journey towards stress free trading.

I hope this helps

[kagein]

Originally Posted by Pipcrawler

Was the recent swing move fast or slow?

i was just wondering, what views you take based on whether the move was fast or not.

[Pipcrawler]

Again, subjective in relation to the time frame and market volatility, but the obvious fast moves are after significant news events or sentiment shifts.

If you want to quantify fast moves, on an intraday basis, price action that moves 50% to 100% of the daily range in one direction can be considered as fast. For example, let's take today's UK retail sales. Data was positive, and Cable rallied about 120 pips within 2 hours of the release. The daily range is about 130 - 140 pips, so about a 85% move of daily range.

Here's an example of how I could have answered the above questions and use Fibonacci If i saw the report live. My thought process after such a report would have been, "UK data was very positive. Cable should rally. Initial spike topped out at 1.9585, rallied 120 pips. Probably no sentiment change on Cable for the rest of the day with no major reports until Philly fed. Looks like sellers have lost steam on 4hr. Could go long after profit taking and target next psychological level 1.9600. Drew fibonacci using 1.9460 and 1.9585. 38% level at 1.9537, begin long position there, stop below 61% at 1.95 and only risk 0.25% of account, and target 1.96, pyschological level where I should run into a lot limit orders." This thought process happens within a couple of minutes and how I would have come to use fibs on that particular play.

On a 4hr chart, if see a move of about 1.5 to 2 times the daily ATR within 2 to 5 bars in one direction, I think of that as a fast move. Again, all subjective to my views and experiences in the market.

I hope my personal views and thought process helps...

[kagein]

Yeah that helped a lot, thanks pipcrawler

[rcgreg]

Thanks for the answer, it makes a lot of sense. I guess the main thing is experience and knowing when to use what tool in what circumstance.