Among the most complicated but most useful indicators used on any trading platform is the Fibonacci indicator. It is a series of Fibonacci lines that show possible levels for trend reversals using the Fibonacci golden ratio. For this article, we’ll share with you the best way to use this indicator on Pocket Option and how to improve trading performance using a strategy that incorporates the indicator.
What is the Fibonacci Indicator?
The Fibonacci indicator is made up of lines that are drawn using the Fibonacci golden ratio from the Fibonacci sequence. The Fibonacci sequence involves numbers whose next number would be the sum of the preceding two numbers. An example of the Fibonacci sequence is 0, 1, 1, 2, 3, 5, 8, and so on. This sequence is continuous without end.
The Fibonacci golden ratio is any number from the Fibonacci sequence divided by its preceding number. Example of the golden ratio is 1, 1.68, .5, and so on. While the Fibonacci ratio is applied to trading, it is also applied in almost anything around us – from man-made structures and objects to nature. As such, the Fibonacci golden ratio is implemented on trading through percentages namely 38.2%, 50%, 61.8%, and so on. By using percentages, traders can have a visual representation of the price movement and levels in a chart.
The Fibonacci indicator incorporates the Fibonacci golden ratios which are represented by lines ranging from 0 to 100. It is used by simply assigning two points from the lowest price to the highest price or vice versa for any market trend. After the Fibonacci lines have been made visible, those lines would be the suggested price levels for retracements.
So basically, the Fibonacci retracement indicator tells a trader the price levels where the price is expected to bounce or reverse during price swings. This also means that the ideal entry and exit points would become visible on the chart using the indicator. While the indicator can be used to find entry and exit levels on an uptrend, it can also be used on a downtrend market.
The image below is a representation of the assumed retracement levels using the indicator.
Referring to the image above, the ideal entry and exit levels on the market are shown by the green and red arrows respectively. These entry and exit levels are identified through the Fibonacci lines. Notice how the price touched the lines before they bounced or reversed – this is the expected result of using Fibonacci retracements.
How to use Fibonacci Retracements on Pocket Option
To start using Fibonacci Retracements, look up the tool settings from the upper left corner of the screen from the Pocket Option trading dashboard. As you click the brush icon, you’ll see a list of tools available. Simply choose the Fibonacci Retracement tool.
After which, draw a line that starts from the lowest price to the highest price of a current swing. The current swing for this case would be encircled by the eclipse in the image. The lowest price is marked by the arrow on number one, and the highest price is marked by the arrow on number two.
After establishing the Fibonacci retracement, stretch the lines by dragging the end horizontally to the right – as shown by the number 3 on the image.
After the Fibonacci Retracement lines have been established on the chart, the retracement levels are made visible.
For this particular example, the ideal entry and exit levels touched the retracement lines before reversal. Trading the recommended entry and exit levels by the indicator on this example would have been profitable.
While using the Fibonacci Retracement indicator is already quite straightforward on its own, there are a few more things to consider to ensure that the indicator is used effectively on the chart.
Can be used on any trend
While the Fibonacci Retracement indicator works perfectly for both uptrends and downtrends, it can also work for markets that are moving sideways or in consolidation. Likewise, this indicator is also good to use for highly volatile markets.
To use the indicator on an uptrend, establish the zero line at the lowest price, and the 100 or 1 line at the highest price of the trend. For downtrends, establish the zero line at the highest price, and the 100 or 1 line at the lowest price of the trend.
In case of a higher high price or lower low price, the Fibonacci Indicator should be adjusted to match the length of the swing or trend.
Placing stop loss
Ideal entry, exits, as well as stop-loss using Fibonacci Retracements are on the Fibonacci lines. However, there are also instances when price breaks through these lines. For such a case, the ideal stop loss would be on the next Fibonacci line. So, if you go long at the 0.5 level, your ideal stop loss should be a line below it which is the 0.382 line.
Using the Fibonacci Indicator lines provide a visible level for ideal target prices, as well as stop-loss prices.
Using Fibonacci Retracements along with other indicators can also prove to be a good strategy to identify ideal entry and exit points in a chart. Among the best indicators to pair with Fibonacci Retracements is the CCI Indicator.
Ideal entry for long trades would be when the price reaches a retracement level and when the CCI curve is at or near the lower CCI line. At the same time, the ideal exit for long trades is when the price reaches a retracement level and when the CCI curve is near the higher CCI line – as shown in the example below.
Our final thoughts
Now the Fibonacci Retracement indicator is pretty much reliable in giving you a potential level where the price will tend to bounce or reverse. Nevertheless, it is still important to do diligent research about the movement of the market. This indicator does not guarantee the exact entry and exit levels on a chart but it does provide a visible view of where reversal may take place.
Depending on the strategy used as well as the experience in using this indicator, it can become really powerful or it can be risky. To lower the risks in using this indicator, all you have to do is practice.
Pocket Option offers a demo account where you can trade in real-time without having to spend a dime. Only through constant practice would you be able to improve trading skills.
For questions, comments, suggestions about the use of the Fibonacci Indicator mentioned in this article, please don’t hesitate to let us know through the message box below.
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