Fibonacci retracements are one of the best ways to understand market price action. Whether you trade stocks, commodities or FX, markets have a tendency to retrace.

This article shows a way to trade using Fibonacci Retracements. If you want to understand the method that I used to calculate Fibonacci Retracements in Excel you can view the article: Calculate Fibonacci Retracements.

I usually want to trade in the direction of the dominant trend. I think this gives the best opportunities to have big profitable trades. One of the challenges of trading with the trend is when to enter a trade. Retracements allow us to enter at what we hope is a good value price. Fibonacci levels are a way to identify these retracement points.

In the chart, the AUD/USD is in a downtrend. This was followed by a period of consolidation. After making a low on 2nd April the price then reacted at the 38.2% level, the 61.8% level and 78.6% level before eventually continuing the downtrend.

## Identifying the Trend

One way that I like to use to identify the trend is the Linear Regression line. The linear regression is a statistical tool that creates the best-fit straight line through the price. In this trading strategy, I am only looking at the slope of the line. If the linear regression is pointing upwards (positive value) then I trade long. If the linear regression is pointing downwards (negative value) then I trade short.

## Fibonacci Linear Regression Trading Strategy

Putting these two elements together we have a trading strategy that trades long and short based on price action.

#### Backtest

I have tested this strategy on the AUD/USD forex pair. I used the daily timeframe between January 2008 and October 2015.

I exited trades using a stop-loss and a profit target. The stop-loss was set to 5 * ATR and the profit target was set to 10 * ATR. A trade could also be closed if another trade opened in the opposite direction. I am using a 50-period linear regression line and a 20 period lookback period for the Fibonacci levels.

Trades were entered on a retracement to the 38.2% level.

I carried out this backtest using a Tradinformed Backtest Model. These models are made in Excel and can be purchased in the Tradinformed Shop.

#### Results

Metric Results
Net Profit \$80,577
Profit Factor 3.24
Win Percentage 53%
Max Drawdown 12.9%

#### Conclusions

These tests results show that the AUD/USD performed pretty well over this time period. The strategy relies on a trending market. If we look at the chart on the left it shows that this market has trended well over this time period.

My results showed that the 38.2% Fibonacci level was the most profitable over this time period. This is quite an aggressive entry point. It means that we have a good chance of getting in on the fast-moving trends.

The 50% or 61.8% level would give us a more conservative entry point. However, we would inevitably miss some trends when the market is moving quickly.

## Video

Check out further explanation of the strategy by watching the video on YouTube.

## How to Develop a Trading Strategy

If you are interested in developing trading strategies my eBook is available in the Amazon Kindle Store. It is called: How to Develop a Trading Strategy. The book contains lots of advice and suggestions including coming up with ideas, refining the strategy and then making it profitable.