The Fibonacci MACD trading strategy is a simple but effective strategy that can be used with any type of trading setup.
This article will teach you how to use the Fibonacci MACD strategy to profit from markets. Stocks, foreign exchange, futures and options, cryptocurrencies, and commodities can all be traded using this strategy.
Let’s begin with a quick overview of the Fibonacci series and how it’s used in trading.
Table of Contents
- Fibonacci Sequence History and Significance
- Fibonacci Application in Trading
- MACD & Fibonacci – Powerful Combination
- Fibonacci MACD Strategy – Let the magic begin!
- Example of Fibonacci Macd Strategy
- Fibonacci Macd Strategy: Pros and Cons
Fibonacci Sequence History and Significance
The Fibonacci numbers had first been described in Indian mathematics as early as 200 BC in Pingala’s work on enumerating possible Sanskrit literature areas to enable syllables of two bundles. They are given the name after the Italian mathematician Leonardo of Pisa, later known as Fibonacci, who popularized the sequence in Western European mathematics in his 1202 text Liber Abaci.
Fibonacci numbers are used in computer algorithms such as the Fibonacci search technique and the Fibonacci heap data structure, as well as graphs called Retracement cubes that are used to connect parallel but also distributed systems. They can also be found in biomedical settings, such as tree branching, leaf arrangement on a stem, pineapple fruit sprouts, artichoke flowering, an uncurling fern, and pine cone bract arrangement.
Fibonacci Application in Trading
Fibonacci numbers are very important in trading because they are used as major key levels of support and resistance during uptrends and downtrends.
You can easily find Fib retracement tools in any popular charting platform and it looks like this-
To find the best entry and exit points, we will use these Fibonacci retracement levels in conjunction with the MACD (Moving Average Convergence Divergence) indicator.
To use a Fibonacci retracement tool, simply move the tool’s zero point to the most recent low and one point to the most recent high; this will generate Fibonacci retracement levels for this trend.
For downtrend also you can do the same just need to put the swing high at zero and swing low at one rest of the settings are same for both types of trends.
MACD & Fibonacci – Powerful Combination
I believe you are now familiar with the fundamental concept and are ready to delve into the practical approach to making real money with the Fibonacci series.
There are two main ways in which fibonacci is generally used in trading –
- Using Fibonacci and price action
- Combination of fibonacci with other trading tools
Now, the purpose of this article is to discuss a second method that combines the use of fibonacci with other trading tools, and for this method, we’ll be using the MACD indicator.
Don’t know how to use MACD ?
Don’t worry, we’ll go over it in a few steps (trust me, no advanced math is required).
What is MACD? & How to Use It ?
Macd is a popular trading indicator that is calculated by subtracting the long-term EMA (26 periods) from the short-term EMA (12 periods).
MACD line = 12 Period EMA − 26 Period EMA
This is how we get the macd line; to get the signal line, we need to plot the macd line’s 9-day ema.
Signal Line = 9 day EMA of Macd Line
The MACD line is also known as the fast line because it moves faster than the signal line, which is known as the slow line.
The difference between these two lines is shown using a histogram; the greater the difference, the larger the bars on the histogram. Histograms depict the momentum of the price move after receiving a signal via macd line crossover. The histogram can be used to determine the momentum of a price move.
When the macd line crosses the signal line from below, a buy signal is generated, and positive bars on the histogram indicate bullish momentum.
When the macd line crosses the signal line from above, a sell signal is generated, and the histogram displays negative bars and bearish momentum.
These two final points should be enough to get you started and using MACD and Fibonacci strategy. If you want to learn more about Macd, I recommend reading wikipedia and expanding your knowledge.
However, if you are lazy enough, that is fine because you do not need any other information to use macd. Remember, having knowledge and converting knowledge into money are two different things, and we are more interested in the latter, so let us begin with our strategy –
Fibonacci MACD Strategy – Let the magic begin!
I want each word in this section to be very specific and productive towards our goal, so if you are tired or do not feel well enough to do some business, I would advise you to take a break because I do not want you to skip any of the steps listed below.
I’d also like to point out that you should practice and paper trade before deploying MACD and Fibonacci strategy in live markets, not because it’s a difficult strategy to implement, but to eliminate any human error that may occur.
Let us begin with a step-by-step strategy procedure for an uptrend ( long entry ) for downtrend or short entry the process and parameters can be replicated accordingly.
- Use your favorite charting platform
- Select a market to trade , you can use any market, any instrument having sufficient liquidity ( trading volume) since this strategy is equally good for any type of market.
- For Fibonacci macd strategy, trending markets are best regardless of whether they are uptrending or downtrending; avoid trading in sideways markets.
- Use Fibonacci retracement tool default setting with zero point should indicate and point to the extreme low of the trend and point one at extreme high ( from where prices are reversed)
- Use MACD indicator with default settings as shown below –
Step-3 Entry initiation
Before proceeding to the next steps, confirm the following conditions; if any of the conditions do not satisfy, there is no need to proceed with the trade; instead, look for other instruments for signals.
- Prices have retraced to the 0.618 OR 0.5 fibonacci support level.
- Find a candlestick that rejects any of the above levels, and if the next candle closes above it, proceed to the next step.
Step-4 Entry Confirmation
- For entry confirmation, use the macd line crossover from below and wait for the histogram to turn green from red.
- Once both conditions are met, The entry signal has been triggered.
Step-5 Stop loss & Target
- This strategy’s stop loss is set below the candle of the fibonacci level retest.
- This strategy’s target is at the 1.618 fibonacci level above point one.
Example of Fibonacci Macd Strategy
In the preceding example, the fibonacci tool is positioned so that point zero corresponds with the extreme swing low on the left and point one corresponds with the highest high from which prices began to fall.
In the following step, a rejection candle at the 0.5 fibonacci level is identified, and the next candle is clearly closed above it – this confirms our Entry initiation.
When the macd line crosses the signal line from below in a row, the histogram turns green from red.
Prices rose after that, making it a very profitable trade.
Fibonacci Macd Strategy: Pros and Cons
- Less subjectivity is involved, making it simple to carry out, increasing the Fibonacci MACD strategy overall profitability.
- Good risk-to-reward ratio – Fibonacci MACD strategy provides some of the best risk/reward trades because the entry is placed precisely at retracement levels and the stop loss is not too far away.
- Good win rate – If all requirements are satisfied, research and back testing indicate a net 70% probability of profit for this strategy in trending markets.
- Overall, fewer signals are generated, especially during weak trends.
- Poor performance in sideways or choppy markets.
- Volatility can occasionally lower a strategy’s win rate because it causes multiple stop losses to be hit before the market moves in the desired direction.
Although Fibonacci MACD strategy is very profitable in the long run for any type of trader, I prefer to recommend it to more patient traders who are definitely positional traders. This is because strong trends do not occur very frequently, and when they do, patient traders can make a lot of money with this strategy simply because they did not hit the rock bottom of their equity curve during choppy markets.
Another thing I like about this strategy is that you can easily master it with paper trades and practice, as well as play around with more tools to get a better conformation rate, for example, I have worked with traders who use RSI very effectively along with this strategy, and if you know a little bit of price action, particularly about candlestick patterns, it is very helpful during trade placement.
using Fibonacci Trading with other technical analysis tools may be quite beneficial, especially for chart pattern traders. When analyzing chart patterns, it is highly important to consider fib levels and trade appropriately.
Author is Senior Technical Analyst
At Bulls Arena Trading
Which indicator works best with Fibonacci?
Momentum indicators are usually safe bets with Fibonacci like MACD, Rate of Change, RSI , ADX
Is Fibonacci retracement accurate?
Fibonacci retracements can be used with price action and other indicators to improve their reliability
What is Fibonacci golden ratio?
ϕ = (1+√5) / 2 which is approximately equal to 1.618