Fibonacci Trading Levels don’t actually work.
We literally have data saying so.
If you take trades using the Fibonacci levels, you are most likely going to lose according to the data.
But when I started trading around 8 years ago, I did find important uses for the Fibonacci tool.
The use cases were so good that I was using Fibonacci in almost every trade.
So, in the next few minutes, I’m going to share the only 3 Fibonacci Trading Strategies that actually worked in my around 8 years of trading experience.
But here’s the thing, I don’t use Fibonacci in the traditional way.
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What does that mean?
You see, many online articles and videos describe the Fibonacci Tool as if the Fibonacci numbers are a magic formula.
As if these numbers are so strong that price will magically reverse from them.
I find that to be a complete crap.
In my testing video, the data showed no sign of any Fibonacci level having an edge.
So, what I did is the following:
Step 1.
I open the chart, then place the Fibonacci Tool.
Step 2.
I go to its settings and hide every Fibonacci level except for 1, 0.5, 0.236, and 0.
Step 3.
To make things easier to read, I tell the Fibonacci tool to show these numbers as percentages instead of decimal points.
Step 4.
Then, I do something that I haven’t seen many people do.
I use some of the hidden numbers to create negative levels.
Why?
I will tell you when I explain the strategy.
By using the hidden levels, I created -23.6%, -50%, and -100% Fibonacci levels.
Now, the Fibonacci tool is ready for my strategies.
By modifying the Fibonacci like this, I was solving 3 problems I faced.
But before I show you that, I want you to understand one very important thing.
What?
I use Fibonacci mainly in the trending market.
When there is an uptrend, I place the Fibonacci tool like this, from the swing low of the upward move to the swing high of the upward move.
Once it’s placed, all Fibonacci is showing is how much the price has fallen in percentage terms compared to the upward move.
For example, when I place it using swing low and high of this upward move, it sees that as a 100% move.
Inside this 100% move, it draws other Fibonacci percentages such as 23.6% and 50%.
The reason why I’m explaining this is that I selected the 50% level because it’s the halfway point of the upward move.
And the 23.6% level because it’s pretty much the one-fourth point of the upward move.
I don’t really care if they also happen to be the magical Fibonacci levels. You can make this 23.6% level into 25% so that it’s exactly the one-fourth point, and it won’t affect the strategy I’m going to show next.
My Fibonacci trading strategy is based on the Fibonacci tool and not the Fibonacci numbers, which don’t actually work according to the data.
What about the negative numbers?
When I used negative numbers such as -23.6%, -50%, and -100%, the Fibonacci Tool basically copy-pasted itself but upside down.
How was this helpful to me?
Let’s go through the 3 strategies and what problems they solved for me one by one.
Strategy number 1:
In the trend, I like to take the trade entry near the bottom of the pullback.
Not at the breakout or other places.
But there are different kinds of trending markets.
Some are zigzag patterns like this.
Some are strong upward price moves.
And some are moves with smaller pullbacks.
In these different trending markets, figuring out if the pullback was big enough to buy at was a bit difficult for me, especially when I was a beginner.
So, what I used to do is the following:
Step 1.
Find if the price is up-trending or down-trending using the 200 EMA.
If the price is staying above the 200 EMA, it’s an uptrend.
If below it, it’s a downtrend.
Step 2.
Then I identified if the price is trending strongly or slowly.
I used a shorter period moving average, such as the 50 or 21 EMA for this.
If the price was staying above the shorter period EMA, I would see this as a strong uptrend. If below it, then as a strong downtrend.
Step 3.
If it was an uptrend, I would place the Fibonacci tool that we modified from the recent swing low to the recent swing high.
Step 4.
Once the custom levels are visible, I would do the following.
If the price was strongly trending, I would see any entry point below the 23.6% Fibonacci level as a good place to buy.
If it was a slow uptrend, I would see the entry point below 50% as a good place to buy.
What did I use to take the entry?
I obviously didn’t blindly buy using just Fibonacci levels because they don’t have an edge according to the data.
So instead, I used things that had an edge according to the data.
I had testing data about the M-A-CD strategy, similar to what we have found on the Trading Rush channel.
If you want, you can learn more about M-A-CD data in the TR Score section of the Official Trading Rush website.
So, when the M-A-CD line crosses above the signal line, and this crossover happens below the M-A-CD’s zero line, I would take a long entry.
The stop-loss would go below the end of the pullback.
The profit target goes below the 0% level of the Fibonacci.
Back then, I was more of a Price Action Trader.
So, many times, I would use candlestick entry patterns to buy, such as engulfing or hammer, near the horizontal support areas as well.
If you want, you can check out the detailed video I have made on how I draw horizontal support resistance areas that get a 60% win rate according to data.
Strategy number 2.
But there is a problem I faced sometimes while using strategy 1.
You see when I take a long trade at 23.6% Fibonacci, I get a good entry.
But what if the price triggers my pullback stop-loss and gives another entry at 50% Fibonacci?
Should I take another trade?
But won’t the second trade be pretty much the same as the first one?
But if I’m going to take another trade at the 50% level, why don’t I just set the stop-loss below the 50% Fibonacci level in the first place?
I first thought about doing that, but I remembered that Fibonacci levels don’t actually work.
What I mean is, that the 50% price level is not strong or something magical.
Just because I set the stop-loss below it, doesn’t mean it’s a good stop-loss.
Entry below the 50% level is good as it’s a 50% discount on the upward move. And on top of that, we are using additional confirmations for the entry.
But stop-loss at or below the 50% level, is not even below a support level.
It’s just at a random place.
So how do I fix this ‘two same trades’ problem?
Well, here’s what I did.
I modified the first strategy steps a little bit.
Step 1.
I still used the 200 EMA for trend direction.
Step 2.
I still used the 50 EMA to see if the trend was strong or slow.
Step 3.
If the price was up-trending, I placed the Fibonacci tool from the swing low to the swing high.
Step 4.
But when the price went below the 23.6% level, I would see this as a good place to take a small trade instead of a normal-sized trade.
For example, if I usually risk 2% at the stop-loss, I would risk something smaller, like 1%.
When the price gave a bigger pullback and came down below the 50% Fibonacci level, I would take the normal-sized trade.
But only when MA-C-D or another data-backed entry pattern would give an entry.
The stop-loss goes below the pullback and the profit target is below the 0% Fibonacci level.
In an uptrend, when we buy at smaller pullbacks, such as 23.6%, the price still has a lot of potential to move down.
This modified strategy not only let me take trades in the strong trends, but if the trend got slower and the pullback got bigger, my risk was lower.
And since the second trade was bigger in size and at a bigger pullback, the previous small loss would easily recover after booking profit on this second trade.
Strategy Number 3.
But what if I wanted to catch the big move of the trend?
In the previous 2 strategies, I have been setting the profit target before the 0% Fibonacci level.
That’s below the swing high in an uptrend.
But what if there was some news that was moving the price up?
What if there was a higher probability of the price moving above the swing high?
That’s where the negative Fibonacci levels we added earlier come into play.
Here’s how I used it:
Step 1.
Identify the direction of the trend using the 200 EMA or news or whatever is moving the price.
Step 2.
Identify if the trend is strong or slow using the 50 EMA.
Step 3.
If it’s an uptrend, I would place the Fibonacci tool from the swing low to the swing high.
Step 4.
I would buy below the 23.6% or 50% Fibonacci levels when the MA-CD or other data-backed strategy gave an entry.
Step 5.
I would set the stop-loss below the pullback.
Step 6.
This is where things change.
Instead of setting the profit target below the 0% Fibonacci level, I would set it below the negative 23.6% level if the trend was strong.
If the trend was too strong, I would set the profit target below the negative 50% level.
Now, I want you to remember a very important thing.
These negative numbers I have added are not magical numbers.
This top negative 100% box is just showing the height of the latest upward move.
My idea for creating this negative box was to see where the price would be if the trend momentum continues, and it makes another 23.6% or 50% upward move relative to the previous upward move.
Why is that important?
Let’s say you took a long trade and wanted to catch the uptrend move above the swing high.
But where would you set your profit target above?
There are many times no reference points above the swing high.
Some trends are slow with movements like this.
And some trends are strong with big movements.
How do you know if the profit target you are setting in the air is not too far?
That’s why the negative box was important to me.
The negative Fibonacci box size changes with different trend strengths.
If the upward trend move was strong, the negative box will also be wider.
I can set a wider profit target.
If the trend was slower, the negative box would also be smaller.
Then, I know to use a smaller profit target.
Improved Strategies:
Everything I shared so far was from the early part of my around 8 years of trading journey.
If you have been supporting Trading Rush on Patreon, you have seen how I trade in the live setups and in the advanced strategy videos.
You might have noticed that some rules I shared so far in this video sound a bit different than how I trade right now.
Well, that’s because, over the last 8 years, I got to learn some important things.
If you are going to use the Fibonacci tool, here are some tips to improve the trade quality using the things I have learned.
Number 1.
In my experience, it’s better to set the profit target before the swing high in an uptrend even if you are trend trading.
That’s what I do most of the time nowadays.
Because if the resistance is stronger, or if the trend ends and goes into a range, your profit target set before the swing high will still have a decent probability of getting hit.
Number 2.
In an uptrend, if the price goes below the 100% Fibonacci level, I see it as a sign of the trend slowing down.
It’s one of the easiest ways to tell if the trend is dying as a beginner trader.
I would avoid trend trades when this happens, especially if the price is not near support.
Number 3.
At one point, I was setting the stop-loss below the 100% Fibonacci level in an uptrend.
Why?
So when the price went into a range between the swing high and low, my stop-loss was still outside the range.
To not bore you, I gave you uptrend examples mostly.
But Downtrend examples are pretty much the same, just upside down.
You just need to flip your head upside down.
You will figure it out.
I believe in you!
So, that’s how I used the Fibonacci Tool the working way.
Support Trading Rush on Patreon if you found this video helpful, and see How I made 100% profit in a year, live setups that actually made profits in the long term, and other things as a benefit.
The link is in the description.
Thanks for watching!