You may have heard Forex
and Fibonacci being mentioned in the same sentence and wondered how the two could possibly be related – but with a bit of knowledge, you may actually find this concept to be very useful to your trades.
How does Fibonacci fit into Forex?
You’ve probably already heard of Fibonacci – he’s the Italian mathematician who introduced Europe to the Fibonacci sequence, where numbers increase as the sum of the two previous numbers…
1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144 and so on.
Beyond the first few numbers, each number is close to 1.618 times that of its predecessor. You’ll be able to divide any figure by its successor and get a certain ratio: for example, 55 divided by 89 is 0.6179. After the 13th number in the sequence that ratio is locked at 0.618. That 61.8% figure is what’s known as the Golden Ratio and incredibly, it’s found everywhere throughout nature – from the spiral in shells to the shape of our own ears.
The Golden Ratio also happens to apply to the trading world, and can be used to guess support and resistance levels fairly effectively. That’s because when a currency price falls or rises a certain amount, a reversal becomes substantially more likely.
How to set up a Fibonacci Retracement indicator?
To set up a Fibonacci Retracement indicator you’ll need to identify the high and low of the trend before it turned: drag the mouse from the lowest to the highest wicks of the candlesticks. Lines will appear drawn at 0%, 38.2%, 50%, 61.8% and 100% of the range. Quite often, you’ll see the retracement begin to reverse back somewhere between the 50% and 61.8% levels (and there’s that magic number). Eventually, the price will break through that previous high (or 100%) and typically continue the trend.
Traders also use the Fibonacci Extension to judge when they should take profit. In this case, they would watch until the price extends past the limits to 161.8% of the range. This can be very useful to the trader when there are unclear levels of resistance or support.
As with all Forex indicators, the Fibonacci Retracement will not always be on the money, but many traders find it an invaluable tool and a reassuring sign if they have a trade in mind. It’s often best used in conjunction with other tools to give you the ability to enter and exit the market with confidence.
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