Traders use the Fibonacci retracement tool in different ways. Some use the traditional settings, while others use a custom version.
You can add (or subtract) different retracement levels, fibonacci extensions, or you can even use the tool to calculate reward/risk levels. You could call it the hidden R tool.
It's usually a pain in the ass to keep manually switching back and forth between the different functions. Most traders just pick one set that they use the most and stick with that.
But you don't have to settle.
Let's take a look at how we can setup the Fibonacci Retracement tool so it works for any trader…
Fibonacci Retracement Tool
The traditional Fibonacci levels are 0%, 23.6%, 38.2%, 50%, 61.8% and 100%. If you really want to get into the history and all the different flavors of Fibonacci, including: Fibonacci Fans, Fibonacci Arcs and more, read this.
Some traders argue that certain levels are more important than others. They even go so far as to say that some of these levels are “real” and others are not.
I personally take out the 23.6 level and use the rest.
But that's just me.
It is something that you have to decide for yourself. The bottom line is that the Metatrader 4 tool comes with these levels as the default, so you don't have to do anything to get them.
However, the next two parts will have to be added. Oh, and I'll explain the other stuff on the Fibo pictured above, in a bit…
Fibonacci extensions work on the idea that price will get to an exhaustion point that is also based on the golden ratios. These levels are traditionally: 161.8%, 261.8% and 423.6%.
They can make good profit targets.
Again, you can use custom settings, depending on how you use Fibonacci extensions. I have given a few examples in the screenshot above.
They are also known as Fibonacci expansions. Here is how to set it up in Metatrader 4.
Now, there is one more trick that you can add to your Fibonacci tool, a reward/risk calculator. If you haven't read my post on that yet, I'll show you how to do it here.
Now you can see why I have marked the 0 and 100 points as “Entry” and “Stop.”Just flip the Fibo tool over and you can also use it as a R-calculator.
In this example, you might put a limit order at the 0 point and set a stop a the current swing low. When price gets to 1.09355, that would be 1R, or a 1:1 reward to risk target.
You can setup targets all the way up to whatever R multiple you choose. I go up to 10R.
Yeah, I'm optimistic…and practical. Profit targets could really get that big!
Here are a few examples of how that would look in the Metatrader 4 Fibo setups.
So that is how to setup your Fibonacci tool so you can use it in any situation. You probably noticed that there are some funny symbols after the “@” symbol.
If you haven't figured it out, that is how you get Metatrader to display the exact price level of the Fibonacci line. It makes things so much easier when you are trading.
Do you use the Fibonacci retracement tool in another way? I would be interested to find out, leave a comment and let me know…