Scientists have found that there is a natural tendency of the collective human decision-making to follow a unique pattern, which corresponds to the 61.8% ratio.
This ratio, often referred to as “the golden mean”, is derived from the Fibonacci number sequence.
This means that in the financial markets, most trading decisions made by market participants follow this sequence.
So, if we can find it in our chart, we can predict what the market participants are going to do when the market approaches that level.
Our strategy will be based on supply and demand zones in combination with the 61.8% and 50% Fibonacci retracement levels.
This strategy is very powerful and works like magic for two important reasons :
- When you identify powerful supply and demand zones, you have found banks’ and financial institutions' footprints in the market; you know that, if a bank buys from a certain level, when the market goes back to test that level, the price is likely to reverse.
- The second reason is that you know that the collective human decisions of banks and financial institutions are governed by the 61.8% and 50% Fibonacci ratios. Thus, you don’t only know how banks and financial institutions trade but can also use this sequence that governs their collective trading decision to identify high-probability entry points in the market.
Let me give you an example with the EUR USD 4H chart below:
As you can see, two important supply zones were formed in the market.
So, we know where banks and financial institutions placed their orders and where the market is likely to reverse from.
Also, if we can use Fibonacci retracement levels, we can detect where the 61.8% or 50 % levels are located in the market. See the same chart below:
As you can see in the chart above, the Fibonacci retracement tool showed us that the second supply zone corresponds to the 61.8% and 50% Fibonacci retracement levels.
So, we have two important factors: we have a supply zone based on banks and financial institution strategy, and we have the 61.8% Fibonacci ratio that governs the collective trading decision of those guys. So, technically and mathematically, we have a very powerful supply zone.
Now, look at what happened next:
As you can see in the chart above, when the market approaches the supply zone that formed between the 61.8% and 50% Fibonacci retracement levels, the price went down because it is a golden zone.
A golden zone is a supply or a demand zone that corresponds to the 61.8% or 50% Fibonacci retracement level.
These zones work perfectly well because they reflect a combination of the way banks and financial institutions trade and the way human nature works, being governed by the golden ratio, 61.8%, when it comes to collective trading decision making.
However, since we don’t know if the market will continue rising so as to test the first supply zone, we need a confirmation pattern to decide whether to take the trade or not.
As you can see, we had a nice inside bar false breakout pattern that indicated that the market is likely to go down.
Let me now give you another example of a demand golden zone to show you how you can find it and how it works:
As you can see from the chart above, a demand zone was formed in an uptrend market. It is a very clear demand zone, but we will apply the Fibonacci retracement tool to see if it is a golden zone or not. See the same chart with Fibonacci retracement levels below:
As you can see, the second demand zone corresponds to the 61.8% Fibonacci retracement level, which makes it a very interesting zone to watch.
So, when the market approaches this zone, we look for a candlestick pattern that confirms a potential bullish reversal; once we see that, we can buy from this point. See what happened next:
As you can see, the demand zone is considered to be a golden zone because it corresponds to the 61.8 % Fibonacci retracement level.
However, there is another powerful demand zone below it, and we don’t really know what the market is going to do.
So, we have to wait for a candlestick pattern to confirm a potential bullish reversal before we enter the market.
Interestingly, two bullish pin bars later formed at that zone. The formation of the pin bar candlestick pattern was a great indication that the price is about to reverse from the zone.
Now, you know that a golden zone is a supply or a demand zone that corresponds to the 61.8 % Fibonacci retracement level.
But if you look at the previous examples, you will notice that these zones can also work well with the 50% Fibonacci retracement level, so such levels can be considered golden zones as well.
The reason is that the 50% Fibonacci retracement level is also taken into consideration by most banks and financial institutions when predicting the end of a pullback and the beginning of a new impulse move.
Since this level has a huge impact on the decisions of market participants, a supply and the demand zone that correspond to the 50% Fibonacci retracement level is considered a golden zone as well.
Conclusion
In this post, I have shown you how to identify golden zones by combing supply and demand zones with 61.8% and 50% Fibonacci retracement levels.
You have also learned what you can use to confirm a setup and make an entry. Why not join our free Telegram channel where we interact and share more knowledge? In the channel, I give out 2 to 3 live Forex signals per week for free.