Fibonacci trading is one method of forex trading that has been around for a while and has helped a lot of traders in their forex trading careers. Ordinarily, it is a mathematical sequence; but somehow, someone managed to apply it to forex trading in a beneficial way.
THE FIBONACCI SERIES
Fibonacci series is a sequence of numbers where every number after the first two is the sum of the two preceding ones.
1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233 …
Like the definition states, the first two, which are 1 and 1, does not apply to the rule of being the sum of the two preceding one for obvious reasons. The other ones, starting from the third, are the sums of the two numbers before them.
The fibonacci series was discovered by Leonardo Fibonacci, a famous Italian mathematician. He discovered that the simple fibonacci series created ratios that described the natural proportion of things in the universe; a really interesting fact.
FIBONACCI RATIOS IN FOREX TRADING:
There are some mathematical procedures involved in proving this (which you may not really be interested in), but the fact remains that it works and the ratios are called the “golden mean”. Coming to the forex related matters, the two ratios that are relevant to our interest are the following two
Fibonacci retracement levels
Fibonacci extension levels
You have to throw in some numbers here and there to get the fibonacci extension and retracement levels; but it can be very boring. So there is the fibonacci calculator to do all that for you while you just focus on important forex related matters.
Both fibonacci retracements and extensions are technical indicator used in forex trading just like Bollinger bands, stochastic oscillators, relative strength index, etc. Like most technical indicators, the fibonacci retracement and extension technical indicators are not difficult to use and as such even new traders can use them in executing their trades.
FIBONACCI RETRACEMENT LEVELS:
In forex trading, the fibonacci series helps traders to get the retracement level; a line based on the fibonacci sequence. This line is considered a predictive technical indicator that can provide feedback on possible future exchange rate levels. According to popular opinions, fibonacci retracements have a high accuracy in the predication of future rates.
FIBONACCI EXTENSION LEVELS:
The fibonacci extensions are used in predicting the spaces of resistance and support in the forex market. The resistance and support levels is very important to traders. They use it to determine the areas that are profitable. With it a trader can set a price target on a breakout of an ascending triangle.
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.