Written by Franz Rumphorst
The Fibonacci 38.2% retracement forex strategy for daytraders is extremely powerful to look for low risk-to-reward entries in both rising and falling markets.
I will be using the pictures below to explain how the strategy works. In this case, we use a hourly chart to draw fib levels and a 5-min chart to pinpoint entry levels in the overall direction of the trend. First take a look at the euro/dollar 1 hour chart below. It shows an uptrend from 1.1875 lows up to 1.2147 peak. Let's draw the Fibonacci retracement levels on the 1 hour chart from the peak to the low in order to locate the 38.2% retracement level.
The 38.2% retrecement level of the recent uptrend is at 1.2045. A couple of hours later, the euro/dollar rate reaches the 38.2% fib level and now i'll be looking to find low risk-to-reward opportunities to go long. How?
I pull up a 5 min chart to spot entry signals in the vicinity of the 38.2% Fib level. I will be using a slightly modificated version of the SMA-Laquerre Forex Trend Strategy (written by Jeff Walker)
to spot valid long entry signals.
Trading rules for long* entries:
- Laquerre indicator is oversold (0- 0.15 value) and moves back above 0.15.
- EMA cross-over shows a green up arrow.
- Enter long trade at the candlesick's close.
- Place initial stop loss a few pips below the 38.2% Fibonacci retracement level.
- Exit Strategy: I typically use risk to reward ratio: 1:3 or at least 75 pips profit target for day trades (whatever comes first exits the trade).
*You can apply the same rules for short trades but do the opposite.
The picture above displays a valid long entry signal at 1.2076 currency exchange rate with stop loss placed 3 pip below the 38.2 fib level at 1.2042.
Risk on the trade: 34 pips.
How did the trade work out?
The euro/us dollar moved nearly 300 pips upwards from our entry level. The trade was exited at 1.2178 for + 102 pips.