Forex Trading – Using Fibonacci Levels
June 9, 2010 by Forex Guide
Filed under Forex Trading
Leonardo Fibonacci was an Italian mathematician who lived in thirteenth century Italy. He was not the first to observe repeating patterns and ratios in nature however his studies led to our understanding and the application of Fibonacci in Forex as it is today.
From his studies he discovered a particular number series that was applicable to the natural proportions of matter it in both nature and the universe. forex broker
The Fibonacci number series is a series of numbers starting with 1. Each subsequent number is created by adding together the two previous numbers. Therefore the second number would be 1+1, the third number 1+2, the forth number 2+3 and so on. From this sequence (1,1,2,3,5,8,13,21…) he identified what is known as the Golden ratio. If you divide any number in the series after 3 by the next highest number the resultant answer is 62.5. The higher up the number sequence you carry out the calculations the closer the ratio comes to 61.8%, which is considered the ‘Golden Number.’ forex broker
The ratios applied in Forex trading make use of this Golden Number and also set out additional incremental stages of this ratio. These are 23.2%, 38.2%, 50.0 % and 61.8%. The low of the move is referred to as 0.0% and the end of the move is referred to as 100.0%
These levels are used in Forex trading to project both price contractions and price extensions within the market.
1. Fibonacci retracement levels
Retracement levels are defined areas, based on the Fibonacci ratio, which aim to identify where the market is likely to pull back to after a move. In an up trending market these are also referred to as a Fibonacci support level. In a down trending market these will be referred to as a Fibonacci resistance level. These provide the opportunity for traders to position themselves to enter the preceding trend after a retracement has competed.
2. Fibonacci price extension levels
While Fibonacci retracements can be used to profit following a market move, Fibonacci price extensions are used to predict how far a move is likely to travel. Again the Fibonacci ratios are applied but in this instance they are used as price targets for the trader to take profits.
Fibonacci levels tend to work due to the expectation of many traders watching and entering the market at these points. Therefore it can be argued that to some degree these levels become a self-fulfilling prophecy.
You can calculate Fibonacci levels by entering the high and the low of a move into a Fibonacci Calculator and apply them to your own charts.
Fibonacci levels make a useful addition to the traders’ toolbox. As with all technical methods it is best to seek confirmation by the use of additional indicators rather than simply relying on Fibonacci methods alone.
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