Fibonacci Level Confluence
The Trading Strategy:
Fib Level Confluence
Trading Strategy Implementation:
This strategy is created by the use of confluence with Fibonacci levels. Because there is some definite contention out there in the world of technical analysis regarding which levels have the most merit, we will simply apply the ones that are most commonly referenced. This is the 38.6, 50.0. 61.8, and the 78.6.
The approach is relatively simple. The trader looks to find areas of Fibonacci confluence in order to time market turns. These areas of confluence are highly regarded, and often lead to market turns, which can, of course, produce low risk entries with high reward setups.
Another area of contention for Fib traders is the issue of where the move begins. Is it the start of the body of the candle? Or the spike of the wick? For the sake of simplicity, we will again refer to the most commonly attributed starts and ends of moves, which is simply the highest high or lowest low.
As for time frame, we have gone with a very simple 1 hour chart, and are looking at the very liquid EURUSD. This pair is put to the test with this Fib Confluence approach, and the findings do not surprise us Pipsters.
The first image exhibits the two ranges chosen for each of the Fibonacci zones. The first zone marked in red denotes the November 30th to December 6th range, while the second, which is marked in blue, begins with the strong move shown in the market starting December 2nd. Of course there may be confluence veterans reading this who will contend with the choice of levels, etc… but for the sake of argument, we can all agree that the area of confluence between Fib levels is without a doubt the 3205 area.
Now, we’re not trying to sell anyone on the idea, so please do not feel we went back historically to find a chart that presents our case. We Pipsters DO NOT use confluence; nevertheless, if we’re to do this trading blog any justice, we need to give visitors as complete an experience as possible.
The second image shows exactly how the market responded to the area of confluence.
As can be seen, the level turned out to be of value. Although it was not held to the pip, and it certainly did not lead to a continuation in the bull move, the trade certainly, had it been initiated, would have led to pips earned for the trader.
As with all our trading strategies, we like to suggest a risk:reward ratio that is favorable to the trader. Trading is hard to begin with… and to make it harder by taking bigger losses than you take gains generally leads to margin calls.
The concerns we have are related to the challenge of applying trade management to the strategy. This is simply a look at the strategy itself. Trade management/money management/ and risk management all need to be considered for those of you looking to form trading systems.
Confluence does seem to have inherent value, and should be looked at by any interested Fib traders looking to improve entry precision.
Trading levels is more in line with what we Pipsters use to trade, and for this reason, we must all agree that we are fans of confluence. This is simply meant to be an introduction to the concept, and further study can be found by some of names who’ve touted the approach for years. Constance Brown has written an interesting book on the matter, and for those looking to investigate further, it’s probably a worthwhile start.
Any suggestions for developing this strategy are welcome. Please do offer the community any thoughts you may have through the comments section.