Do you find it difficult to place the Fibonacci retracement tool in the right way?

Learning how to use price swings is a valuable method for both 1) Fibonacci trading and 2) pinpointing the best entries and exits.

This article explains how you can improve your Fib drawing skills by learning how to place the Fibonacci tool on the correct price swing. 

Wave Trend Indicator Helps Determine Fibonacci Direction

Elliott Wave traders have a secret advantage when it comes to Fibonacci. They must learn how to read price swings before they can understand wave patterns. This means that they have mastered the very skill needed for using the Fibonacci tool accurately. 

Non wave traders are not as lucky… but the good news is that understanding price swings is pretty straight forward. Especially when you are using a wave trend indicator like the Awesome Oscillator (AO) or ecs. MACD for determining how to place the Fib tool on the chart. 

The wave trend oscillator is a key tool to removing any doubts about where a price swing starts and when a price swing ends. It is a systematic method of analyzing price swings. The Elliott Wave count with the Awesome Oscillator is also much simpler to recognize, but we will save that for another article (now it’s time to focus on Fibonacci). 

You can use the wave trend indicator for:

1. Understanding the direction of the Fibonacci tool.

2. Placing the Fibonacci tool on the correct price swing.

For bullish placement of the Fib tool: 

• Strong oscillator bars lines above the middle point indicate bullish momentum. 

• The Fib tool is best used for entering longs upon a corrective bearish retracement. 

• Here I place the Fib from bottom to top and look for a correction back to the Fib levels.

For bearish placement of the Fib: 

• Strong oscillator bars are below the middle point indicate bearish momentum. 

• The Fib tool is best used for entering shorts upon a corrective bullish retracement. 

• Here I place the Fib from top to bottom and look for a correction back to the Fib levels. 

When price is in a range: 

• Weak oscillator bars around the middle point indicate no direction.

• Using Fibs becomes less desirable.

As you can see, the wave trend oscillator helps determine the correct direction of the Fibonacci tool. 

Wave Trend Oscillator Determines Fibonacci Placement

The wave trend oscillators are also a powerful concept in determining the best swing for placing the Fib tool. Many traders use the Fib tool too frequently and at the wrong spots… But the wave trend oscillator keeps traders focused on using the best swing for placing the Fib tool. 

So how does it work? 

1. I place the Fibonacci tool on the top and bottom according to the direction of the oscillator. 

2. The start and end are indicated by the decline and rise of the oscillator.

3. One price swing is complete when the oscillator has reached a peak plus has returned to the zero (middle) line.

In the below example the trend is down as price makes a lower low and lower high. The bearish momentum is also visible with a strong bearish candle. Also, the oscillator made a strong decline which means I can place the Fib from top to bottom. 

Once the oscillator starts retracing I can look for a pullback to the Fibonacci level in search of a continuation down lower in line with the bearish momentum. This allows me to trade the wave trend. This technique is excellent for a wave trend strategy as well.

Do keep in mind that the full correction/retracement is officially only completed when the oscillator bars have gone back to the middle line (after a strong push to 1 side). The moment when oscillator bars cross and re-cross back represent one swing high and swing low. Only then is the swing fully completed. 

Of course, one swing could be broken down into several swings on a lower time frame. There are also corrections where price has made a very quick retracement (see purple boxes in image below), which are called pullbacks (light retracements).

Traders can also place the Fibonacci tool on a candlestick or candlestick pattern. Placing a Fibonacci tool on the candle is very simple: 

1. Check for direction:

   1. If the previous candles were bearish, place the Fib on the nearest candle high to candle low. 

   2. If the previous candles were bullish, place the Fib on the nearest candle low to candle high. 

2. I personally do not consider a candle retraced if price does not pull back to at least the 23.6% of the candle but I typically wait for a retracement to 38.2% or 50% Fib of the candle before entering. 

3. In some cases the stop loss can be placed below the candle low or above the candle high. This is especially true when using a daily or weekly time frame.

The technique is simple and capitalizes on the natural low and high tides of the Forex market. Of course proper analysis has to be completed before applying the concept to the charts as the method indicates how a trader can enter, not whether the entry is statistically viable. 

The idea can certainly be combined on multiple time frames. For instance a strong weekly bullish candle could get a 50% retracement which could signal a potential for long. A trader then zooms into a 4 hour chart and sees a bullish candle at the 50% Fib. The trader takes an entry order at the Fib of the 4 hour candle (either via pending or market depending on where the price is).

As you can see, the wave trend oscillator helps determine the correct swing plus the right start sport and end spot for the Fibonacci tool. This is a systematic method of understanding price swings and wave patterns based on the wave trend indicator.