Fib Retracement Trading

I’ve had a number of requests about how to utilize fib retracements in the markets. So, rather than ***** out another thread with off topic chatter, I thought I’d just start a thread that we can discuss setups and different plays in.

If you want the gist of how to utilize and draw fibs, check out this video. It is not mine, I didn’t make it, but I think it illustrates the basics of the method fairly well.

I focus 99% on 61.8% retracements in the markets WITH THE TREND, IN A TREND, on the 60 and 240 minute charts. I also play a shorter 233 tick (allmost like a 10 min chart) for pure daytrade entries.

So as not to violate link rules on this forum, if you are interested in the video i’ve been speaking of simply pull up Google Video and type in “Fibonacci forex” and search. The video should be the first result. I recommend viewing it on the google result type for better video clarity.

I’ve got some running around to do today, but i’ll try and post up some chart examples later today.


[B]Basic outline of this thread so far:[/B]
Lesson of the Day: Basic Setups
Lesson of the Day: Ticks Vs. Time Charts
Lesson of the Day: Some Example Trades
Lesson of the Day: Trade Examples
Lesson of the Day: Respecting Da Grids
Lesson of the Day: Advanced Tactics
Lesson of the Day: Trade Management Pt. 1
Lesson of the Day: Trade Management Pt. 2
Lesson of the Day: Trading Journals
Lesson of the Day: Scaling out of Trades = The BAD
Lesson of the Day: The Take Profit Revelation
Lesson of the Day: Adding Size
Lesson of the Day: Stop Loss Revision
Lesson of the Day: Secondary Indicator Confirmation
Lesson of the Day: Shallow Pullbacks, the other 50% of Forex Action

Thanks for sharing, I watched the video couple times and got the basic idea about Fibonacci trading. I also read the 3rd grade of the school of pipsology again where I came across the following statement:

"Alone, Fibonacci levels will not make you rich. However, Fibonacci levels are definitely useful as part of an effective trading method that includes other analysis and techniques. You see, the key to an effective trading system is to integrate a few indicators (not too many) that are applied in a way that is not obvious to most observers.

All successful traders know it�s how you use and integrate the indicators (including Fibonacci) that makes the difference. The lesson learned here is that Fibonacci Levels can be a useful tool, but never enter or exit a trade based on Fibonacci Levels alone."

Do you use any other signals or indicators to confirm your trades?

I don’t agree with babypips on that one point. I think grids play the most significant role in price action out of any indicator or methodology i’ve seen. But then again, I am slightly biased. That being said, I do use a couple VERY simple indicators only to indicate trend bias.

[I]I have revised my MA’s for trend bias… the above work, but these tend to hold the trend a bit better for my type of trading. Only indicators on the charts are:

62 EMA
78 EMA

Same principals still apply, just make sure your trading with the trend of the MA’s which means the fast ma is above/below slow ma to establish trend either up or down.

The chart examples below were created when I was using different MA’s. Since then I have revised the system slightly to be more efficient using the above EMA’s.

The 62 and 78 are there to establish the overall trend, up, down, or sideways.

Thats it… nothing more. That being said, here is the most important point of all. These pullbacks work extremely well when the markets are trending. Sideways and consolidation points in the charts are not the best place to enter a position be it off a grid, or any other indicator. This means that the first thing we look for is either higher highs or lower lows with our MA/RSI bias.

Until I have a chart pattern like that there is no point in playing. Far too often traders of any methodology are constantly looking for the best place to be in at all the time, 24/7 with no mindfulness of the chart pattern they are trying to trade within. Consolidation chop is consolidation chop, and until movement occurs I don’t have anything to do. This is the biggest point that I cannot stress enough.

Also, keep in mind you need to keep track of your risk:reward ratio to have good success here. I put my stops 1 pip outside of the 85% level. If there is too much risk between where I can get in at the 61.8 level and the 85 level, i stand aside. You have to think of EVERYTHING in terms of risk a reward. If you don’t you’re a dead duck before you get off the pond.

I’ve added a couple examples here… Hopefully they are fairly self explanatory. I’ll add more later on… There is sooo much I want to discuss, i’ll add more as thoughts hit me.

I wait for the pullback to come back and TEST the level… if it doesn’t touch, it doesn’t count. Entry is after close of the candle that interacted with the grid, entry at open of the next candle.

I also will play 38% pullbacks, but i’ll go into the specifics of them later… I don’t use them nearly as often, and you need to set different stop losses, and I also require the grids to come into contact with price action 2x’s and hold before entering the position.

Tick Chart Differences/Benefits:

A tick chart is a chart that builds candles on a set amount of “ticks” rather than a time chart that builds candles based off a set amount of time. A tick is an order that goes into the market. So a 233 tick chart opens and closes a candle every 233 orders.

The good:

  • Added clarity in swings.
  • MA Values/Biases are influenced by actual volatility, rather than some period of time.

The bad:

  • Not all chart providers (most free at least) don’t provide them.
  • Can’t predict close b/c its based off market volatility rather than, “oh that candle closes at 10:50, i’ll be at the screens for it.”

The first attachment should illustrate the difference between how a 10minute and a 233tick will vary. Notice how clean the swings are on the tick chart, and note how the same swing on the time chart is drawn out and distorted. Clarity in grid trading just makes life easier. Tick chart is on the right, time chart on the left.

The second attachment should just illustrate again the clarity if I were considering buying this swing, look at the chopped clutter that could fake you out on the time chart. The tick chart on the other hand doesn’t display that shakeout. Again, tick chart is on the right, time chart on the left.

Obviously, you can use either or. Price action remains the same. It is just my personal preference to favor the tick charts for the above reasons. Forex has a lot of consolidative chop, and the tick charts do wonders to clear up the mess time charts can make. Over the same period of slop, a time chart might print 10 candles, because 100 minutes has passed. In contrast the tick chart will have printed two candles, telling you that nothing has happened. It keeps you out of crap more often than not.

Its my trading methodology that its more important to stay out of the losing trades, rather than get in the winning trades. More should be added as I think of things to add, or if you guys have questions.

Third Attachment: One trade that i’m holding in as we speak, long the EURUSD. Explanation of setup and entry on the image.

My attachments apparently were too big and have been scaled down to fit… i think the first two you can still tell the difference. I re-uploaded the last so you could make out the trade setup.


i like the way you draw your fib. but, isn’t it better to just join a trend and move on, i mean, in a trending market. does your fib method involve a kind of scalping where you enter in the retracement and scram at the end of the correction?
is fib the only trigger you use in entring the market? no s/r lines etc?
do you keep and eye on the news/fundamentals?

actually, i made 20 pips last night from fib…it just coincided with an s/r line i had drawn…really cool.
thanks for the insight, i really am getting something here. :slight_smile:

You mean join a trend a just hold the position? You could certainly do that, my trade management is certainly not and end all be all. I just try and reduce risk as soon as its prudent to do so and keep my rewards equal to or greater than what i’ve risked on each trade. All this will offer is a way to enter the market. The management is up to you.

This can be used to scalp. However, like any other method, the smaller the time frame the higher potential for fakeout moves. Frankly, i’ve traded a 1min and 3 min chart in the S&P for the past year. I like the freedom and laid back time frame the 60 and 240 provide me. Furthermore, they allow me to remove myself from my management and just let the darn thing work or not without me second guessing myself. But like I said, that is all personal preference.

Yes, I only use fibs. S/R lines are good, but frankly as far as i’m concerned less is more. You could combine this with any method on the face of the earth and when you get congruence between the fib grids and the other method i’m sure it would be a very high % win rate. I’m open to ideas and suggestions, but at this point in time, i’m happy with the results i’m producing.

Now for the lesson of the day.

First Attachment: A continuation of last night really. RESPECTING THE CHART PATTERN. I’ve illustrated this off the 233t(10min) charts this morning in most markets. This should really get across the point of utilizing the grids in trending markets, and not trying to force things without the trend.

Second Attachment: My Typical trade entry and management. Signal fired off at the yellow arrow. Entry is at open price of red arrow candle. Stop loss put 1 tick above the 85% level. Once the 38% level has been hit on the blue arrow candle I move my stop to the 61.8% level which should be fairly close to entry. Essentially reducing your risk down to nothing. If the move has credence and has already bounced off the 61.8% down to the 38% level it should continue without a retest of the 61.8% level. If it does, it probably isn’t going to work in the first place and your out with minimal or no loss.

Now on the pink arrow, price has moved down to the swing low. Moves can and do fail to produce new lows, and if they fail they fail at that level. Its typically again where I like to lock in profits by moving my stop down to the 38% level. I’m still shooting for my extension or 2:1 reward targets, but i’ve locked in profit should i be on the last swing of a trend and it comes back in my face.

The blue and cyan colored arrows are profit target levels defined by the swing. Depending on if and how you’ve scaled into the position you could cut contracts loose at each level. Your final exit would be a at the 161.8 extension and will be well in excess of 2:1 on the trade.

Heres a quick setup on a trade I took today off the 60 minute chart.

As you can see the MA’s and RSI are clearly bearish, the market is making new lows from the last swing, a nice clean pullback, adherence to that level. I entered at the open of the next candle, managed like normal… and whadaya know… it went straight to the 138% extension. As you can see the management technique of removing risk as the different price levels are hit worked perfectly. Stop was moved once 38% was hit, again once the swing low was hit, and my profit target was achieved at 138% and 161.8%. I maintained a rough 2:1 risk/reward on my position.

Entry: 1.6441
Initial Stop: 1.6467 (26 Pips of risk)
Target 1: 1.6407 (34 Pips of profit)
Target 2: 1.6396 (45 Pips of profit)


Keep in mind folks, for most traders the hardest part of trading is DOING NOTHING. Sitting on your hands is the easiest way to stay profitable. Wait for the clean setups where you’ve got everything going for you. No indicator developed under the sun can improve your trade win percentage and overall profit loss like that advice. Trade - Don’t Gamble out of boredom!

Cheers folks!

Thanks daedalus I will try trading Fib levels om my demo account. As I don’t use Tradestation I don’t have the JTHull MA. I hope it is not very important. Maybe there is something I should use instead of it?

The JTHMA isn’t that big of a deal, but there really isn’t anything that is calculated remotely close to it. If you just left it out you would be fine. The key idea is that all of the ma’s lines are set up appropriately to increase the odds of trading with the trend.

I know this isn’t a very popular method because most FX traders are looking for a systematic do A, B, C, and you make pips approach with indicators, but for those still interested in something that isn’t subject to the problems those indicators bring up (fake outs, bad signals, entering after the move has taken) here are some more setups and information.

First and foremost, i’ve done some backtesting further with PSAR and some other indicators and MA setups to see if there was a better, more profitable way to establish trend bias but I came back to what i’ve been using. Whatever you gained on one setup was lost on the next, so the indicators remain the same. I’ve even pulled the JTHMA’s off my 60 and 240 min charts as they were doing more harm than good. It is VERY important to realize that the grids have superiority over any ma value out there. If price respects the grid, you had best do the same regardless of trend.

The following uploads are the daytrade setups from Friday. You’ll note that most of the plays were off the news reaction swing in the morning with Non Farm Payroll as it was announced in the U.S. Markets. I just played the pullbacks that signaled as necessary. They all worked out for at least 1:1 assuming you entered at the open price where the arrow is and set your stop 1 pip above 85%. Please note that on the AUDCAD setup I did not draw the grid from the swing high proper, but from the swing high of the news announcement. I have found that many times the markets respect the grids of major news announcements primarily than any other swing. If you had draw it proper it wouldn’t have hit an exact 62% retrace. If thats the case and you want to keep things simple, oh well, no signal, no profit, no big deal. Move on to the next.

Also note that all the trades were just with the trend 100%. The GBPUSD trade was a bit more “sketchy” and because it had been sitting on top of the 89 EMA I took profit at the 89 EMA expecting that it could bounce from there. That is just the discretionary aspect of trade management. I decided to play it better safe than sorry in that instance.

Next up… Current swing setups and some more on grid measuring.

The first three images are the current setups and plays i’m in. All are strictly with the trend. I mis-labeled the EURCHF trade as counter trend but as the MA’s suggest, it is not. I think i also explained before how I will take a trade if it fails at 75% or 85% and then re-established itself up into the 62%. I hold the swing then to be intact and I enter the trade with a tighter stop loss just below the 75% level. That level has already been tested and thus, should hold.

The next post will be the lesson for today: RESPECTING DA GRID!!!

Lesson: Respecting Da Grids!

Ok. The idea here is that regardless of what an ma value tells you or a trade that your in, you need to be constantly measuring for different fib retracement points that could be affecting your current trade or that you need to be aware of to keep you out of the next setup. I’ll illustrate this with recent price action in the EURJPY.

Image 1: Assume that we are just trading along and we don’t know the outcome of the full chart from the blue arrow onward.

The chart is trending higher, ma values are bullish, the last swing we have measured made a higher high, it pulled back and failed at 62% so we should go long. Well, no. Lets look at the bigger picture here first.

Image 2: What happened right before our setup? On a bigger grid price action came up to overhead resistance and FAILED. It couldn’t break through (at least not yet) so our setup now becomes VERY risky because we are trading into heavy fib resistance now. You always need to respect the bigger grids in play. They superceed any smaller grids. And once again if price action respects them, you respect them and don’t put yourself in a trade that goes counter-trend to what just happened REGARDLESS OF WHAT THE MA’S MIGHT SAY!

Image 3: Lets assume we took the trade anyway. We feel ballsy, are aware of the bigger grid but want to play a small scalp to the upside. Fine. I’d be lying if I said I hadn’t done it before, and that I wouldn’t do it again. We again need to be aware of another grid in play here. Now on any trade you take there will be a grid going counter to your pullback. Thats just how it works. But we want to measure them and be aware of what price is doing at those levels. This is why I try and remove risk at 38%, because there is always a chance it can come back in my face. In this instance had I taken the trade I would be targeting 38% to take my profit there. If not, i would at the very least put my stop at break even so I have no risk should it come back in my face.

Image 4: The highest probability setup yet. Yes, the MA’s say bullish, so if your really conservative look elsewhere, this isn’t for you. But price has just rejected a bigger grid, failed again at a smaller grid and made a lower low. For me, if that happens and price again fails on the pullback i’ll short the **** out of the setup. And again it works!

So just be aware of the different grids in play. I don’t always play the most recent grid. I try and measure two swings backwards to see where overlayed confluence occurs. Typically any further than that and there isn’t much relevance unless you are checking bigger grids for relevance.

Hope this helps! Cheers!

Many thanks for posting your work…food for thought and re-awakened an interest in Fibs :cool:

Just curious…I’ve skimmed the posts on this thread and don’t see any reference to what I’m about to ask (if I’ve missed your references, please forgive me)…in your UBPUSD chart in post #10, are the green and blue dots identifying IBs and OBs together w/indicating potential long entries (green dots) or short entries (blue dots)? [I’m so new (at this), I haven’t been taken out of the box yet!!]

I don’t know what IB’s and OB’s stand for but those green and blue dots are just visual indicators of potential swing highs and lows I like to measure from. Nothing significant to the method at all. Not an entry signal by any means. Those dots are calculated via 3 higher highs or 3 lower lows, also know as the Trade The Markets Scalper Indicator.

Advanced Tactics…

Well, we set our stop losses outside of 85% right? That means that we believe we are wrong if price action breaks below 85%. Well, this knowledge allows us to put ourselves in a position to catch reversals and play counter trend trades.

This is always more risky than playing with the trend so you need to be quick to take profits.

Here is a trade I took tonight. Often times price action will stop running in a direction and consolidate and reverse, even if it is only primary. I have found that price action can be considered to be NEUTRAL if it is between the 89EMA and the 150 JTHMA (i’m sure there is a longer period SMA or something similar to spot this if you don’t have access to hull moving averages).

Thus, this is a good indicator of neutral price action where you can get in on the action on both sides and make some more pips. It requires you to dial down to a smaller time frame chart to be more nimble with your entry and exit. My smaller chart is a 144T (vs. 233T), roughly twice as quick, over layed with a quicker 50 period JTHMA, and the usual 89 EMA. I want to make sure i’m trading with the trend on this chart on these setups. So even though it may be counter trend to my big 233T chart, it is with the trend on our 144T (or similar) small time frame chart.

Image 1: Price action clearly in a point of neutrality between MA lines.

Image 2: Note how price action has broken the last dominant swing upward by breaking 85%. This adds to my confidence in playing a counter-trend short side play here.

Image 3: Pretty self explanatory.

Image 4: Dialed down to my quick chart I take the same pullback with the small time frame bias and take profit quickly (or at least reduce risk quickly). I took profit at a known level of resistance, being the 89 EMA line on the chart. But still good enough for a quick +18 pips.

And that is one way you can identify and play counter trend possibilities with Fib grids!


Alright, much has been asked, debated, argued, and discussed on this forum about having appropriate management of trades. I believe it to be one of the most misunderstood and sloppy areas of any traders system. Usually it is not defined, and if it is, it is subject to the whipsaw of an indicator or some other factor. Fib levels allow a specific advantage in this area because they MEASURE price action and thus give us visual price levels that we can utilize to take profits and reduce risk systematically on each trade we take, in the same fashion each time. I am going to provide you the exact way in which I manage my stops and profit targets. I had briefly talked about this before, but were going to go more in depth on this one.

First things first. I recommend trading using at least 2 lots. One of the hard things about trading with only 1 contract is you see profit, and you want to take it, but you know if you do you aren’t allowing your winning trades to develop fully which hurts your p/l, but also it keeps an additional risk out there that the trade could reverse and come back in your face for a loss. For this method to work, you really need at least 2 contracts. You could apply the same technique to 2000 contracts, but you need more than one for starters.

The idea revolved around using the first contract to take a quick profit at a HIGHLY probable price point. More than 90% (probably more) of the signals this method uses will hit a 38% price point. I also said before that price can reverse here and move against you, so what we have done is to take a quick profit by exiting 1 of your 2 contracts at the 38% level, and then putting your stop at the 62% level on the 2nd contract. So what have we done? We locked in a quick profit on one contract, and we reduced our risk ideally to nothing on our 2nd contract. This will allow us to take some profit out of each trade even if it doesn’t work and the 2nd contract stops out, or ideally will allow the 2nd contract to really work in favor and we can gain even more pips, but without any adverse risk to our p/l in our account.

It becomes a free trade, and PSYCHOLOGICALLY, this is KEY to allowing yourself to let your winning trades ride out for more and more gains. If that was the only contract you had on, you would want to be jumping out at every little bump due to fear. This management reduces your fear of loss, and thus will increase your profits.

READY TO LEARN? Here we go! I used a trade that just concluded on Friday in the AUDUSD. I walked away with +205 pips using this technique.

Image 1: Check our chart alignment. Bearish MA’s, last upswing broke 85%, meaning downside potential is there. So lets get ready to play!

Image 2: Flip the grid and measure the downside swing. Note how the first pullback into 62% blows through. There is no signal here.

Now note this: If price action continues upward and fails at the 75%, or 85% level and then REESTABLISHES back below the 62% level, i will take that trade. However, if price was to reestablish back below the 50% line, while downside is probable I won’t take the trade because price is outside of the 50%-62% area on the grid and there is too much risk from a management perspective to take the trade. I only want to enter if i get the signal and price hasn’t blown away from me beyond the 50% level.

In this case, price went up and tested 85%, but failed back below 62% and is still firmly between 50% and 62% so entering at the open of the next candle is A-OK! Entry at the open of the candle with the arrow above. Initial stops are placed at 85% like usual on both contracts

Image 3: Price action goes down to 38% without a fuss. This is the time that we take our first contract off at the .8780 level for a +32 pip gain. Furthermore, we move the stop loss on the 2nd contract from the 85% level down to the 62% level. Worst case scenario is we get stopped out on the 2nd contract for a nominal -9 pip loss leaving us still net profitable. This puts us in a winning trade regardless of outcome. Yet we have no risk to bear here because we know were walking away with profit, so why not let the trade continue to work from here for more money? We have NOTHING to lose, and EVERYTHING to gain. This is the kind of situation traders need to put themselves into.

Image 4: As price action continues downward our next stop loss movement occurs when price action hits 23.6% on the retracement. At which point we move our stop loss from 62% up to 50%. This locks in profit on the 2nd contract for a worst case scenario, but allows the trade to continue to work.

Continued Below in Next Post!

Trade Management Continued…

Image 5: Note how price action does retrace, but doesn’t come back into the 50% level. I have found it is more likely that price won’t pullback into that level if the move is solid. If there is no more room in the trade to work it will fail, but then again you have no risk and have locked in profit on both contracts so whats the harm? We again have no risk here!

So the next action point is when price action hits the swing low/high at 0.00%. We again move our stop loss on the 2nd contract to the 23.6% level to again lock in more profit on our 2nd contract. Price action commonly fails at swing highs or lows in forex, so I want to bump up my profit i lock in on the 2nd position. If it has more room to run here it shouldn’t retest 23.6%, if it does so be it, if not I walk away with lots of pips!

Image 6: Time to take profit on that last half position. I prefer to take profit at the -38.2% (or 138.2% extension depending on how you look at it). Note that if you choose to continue to let the trade go, I would again move the stop loss limit down to the swing low/high to again lock in more profits.

Image 7: You could choose to use some sort of secondary indicator for an exit on the last half position. I’ve found the slow stochastics on the base settings can be a good indicator of a trends exhaustion when the slow line (red line) enters the lower quadrant (<20) on the candle close. You could use a bunch of different indicators if you want, just one example of another way to exit the last part of your trade.

Image 8:
A recap. Our inital risk is removed quickly and in the highest probability way. We take profits quickly and reduce risk to nill on the second part of our trade. We can have our cake and eat it too using this method and two contracts. Quick profit, and long term winning runners. All wrapped up into a systematic, consistent method to remove risk, lock in profit, and let profits run at the same time. And its a management technique that will work on any market, any time frame, and swing, big or small. What more could you ask for?!


Really nice step by step description of your trade management Daedalus, thanks

what about the golden ratio? can anyone explain more detail?