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The Fibonacci Retracement is a very powerful indicator that can calculate levels in which price will reverse with utmost precision and accuracy. In this article you will learn how you can use it to generate high-accuracy signals and Forex profits.

The Fibonacci Retracement is based on Fibonacci numbers and the ratios between them. Basically, Fibonacci series is a series of number in which each number is the sum the two previous numbers:
1,1,2,3,5,8,13,21,34,55,89,144,233…

The ratios between the number 34 to each of the next Fibonacci numbers are called the ‘Golden Ratios’ and they are what we will look for in Forex retracement calculation:
34 / 55 = 0.618
34 / 89 = 0.382
34 / 144 = 0.236
34 / 233 = 0.145

The Fibonacci tool calculates these ratios on price and generates levels on the chart. For some unknown reason price tends to retraces and ‘test’ those levels after a strong trend, usually the first level of 0.382.

The way to generate profits with the Fibonacci Retracement is straight-forward. Look for a period of strong trend. Then, when price begins to trend in the opposite direction select the lowest low and the highest high of the trend and use the Fibonacci retracement tool on them:

You will see that this tool automatically draws retracement levels on chart. We will usually trade only the simplest retracement to the 38.2 level as price frequently tests this level and then continues the trend. After price hits this level we will look for one candlestick to form in the direction of the trend, to enter the trade and join the trend. We will later check the momentum of price (mainly using the SMA-20): if it has strong momentum we will continue to hold the position even if price hits the previous high of the trend, expecting it to break it and continue. If you see that price reaches the previous high and stops – it is a sign to close the trade and take your profits.

In case price breaks the 38.2 retracement level and bounces on the 68.1 one, we will not take the trade. If price breaks the 38.2 it is a sign of weakness of the trend and we will not join the movement.

Stop loss is usually placed right below the low of the entry bar (for long trades), or above the high of that bar (for short trades). This minimizes your risk and exposure and makes sure you have a very solid Risk:Reward ratio in all your trades.

That's the advantage of this kind of trading – you enter at tactical points right before prices reverses, but you join a strong trend and your reward is usually very high. The Fibonacci tool can be quite useful and you can enter very accurate trades with it with ease, with very tight stop loss and high reward.