Fibonacci confluence is a trading method that utilizes a grouping of Fibonacci retracements, extensions and expansion level that occurs in close proximity to each other on a price chart. Another common term that is used is Fibonacci clusters.
It is a little more in depth than the common use of Fibs but with practice, you should be able to master it just as easily as the basics. I just want to add that a confluence trading method still requires the usual parts that go with a trading system:
- What is your entry trigger?
- What are your risk parameters?
- Where is your stop loss going to be placed?
Confluence zones are just places we will look for a trading opportunity…not necessarily a trade. Please keep this in mind as you begin to learn about Fibonacci confluence zones while trading Forex.
Do You Need A Special Fibonacci Confluence Indicator?
You do not need any special trading indicator outside of the normal Fibonacci tools that you will find on most charting packages. The “trick” comes to deciding how many or the Fib ratios you are going to use.
Joe Dinapoli for example discounted most retracement ratios except for the 38.2 and 61.8. I like to add in the 78.6 retracement level because I have found that to be a “line in the sand” when it comes to price and an break of that can actually set up a nice trade to a Fibonacci extension level.
Finding Our Confluence Zones Using Fibonacci Retracements & Projections
This is a little more advanced than using one measurement and will take some practice. We want to look at our chart and zero in on an obvious swing point low. For this example we are going to use an uptrend so we are going to look for a confluence level that may give us a support zone.
- Swing point low to start our retracements
- Swing point high where we stop our pull.
- Using our 3 point tool we click this high
- We then click this low
- This high and we are using the 100% symmetry level
- Our tight confluence zone consisting of 38.2% retracement and 100% projection
The Fibonacci retracement level of 38.2% may be something you know. The 100% projection is based on swings being of equal distance (A-B=C-D)
Price Action Trading In Confluence Zones
A confluence zone is simply a place for opportunity and is not the actual trade. For the trade, you may want to look at using price action trading as a means of getting into the trade.
- This is the general area of the confluence zone on this Forex chart
- Strong bear candle breaks out from consolidation into the zone
- Strong bull candle takes out the body and high of bear candles. You can use a break of highs as an entry.
Using Confluence Zones As Part Of A Trade Plan
The benefit of using Fibonacci confluence zones as part of a trading system is that it helps you zero in on a location for a trade as opposed to simply guessing. Fibs can also be used as a targeting method but is beyond the scope of this article.
Give it a try and let me know what you think.