Every day trader will agree that it is really out of place to talk about support (swing low) and resistance (swing high) without talking about fibonacci. Fibonacci plays a very vital role in ranging markets where the levels of support and resistance need to be identified and applied in forex trading.
In this article, we will cover the basic issues related to fibonacci projections and how you can apply its tactics to your benefit while trading. The basic issues we will cover are
Fibonacci; support and resistance
Fibonacci price projection technique
Identification of fibonacci extension level
FIBONACCI; SUPPORT AND RESISTANCE
Fibonacci is a sequence based on the rule that each of the values in the sequence is the sum of the preceding two numbers. From this definition, all things being equal, one can make a fibonacci sequence out of two values; you can add up the value and get the third value, add the third number with the preceding value to get the fourth (and so on). Relating it to the forex market, a trader can calculate the next “price stop” with two values (fibonacci numbers) in the “right market environment.” fibonacci can be used in any market environment if need be, but the best market environment to apply the fibonacci trading technique is a trending market.
The terms “support and resistance” are fibonacci values in a chart showing the price movement of a security in a trending market. Support is the lowest level the price of security can get to before it starts going up again, while resistance is the highest point the price of a security can get to before it changes course and tarts to go down.
FIBONACCI PRICE PROJECTION TECHNIQUE
To trade fibonacci, you will need to calculate the fibonacci extension levels; the swing low and swing high. If after calculating these levels with the fibonacci calculator, and all things are going as expected, then fine. You can till trade on confidently knowing that the market price is not against you “yet”; that does not mean it will not. Now, if things start going unexpectedly, if the price exceeds the swing points used in calculation, what will happen? Should you keep trading, or exit your position? In time like this, the best thing to do is apply fibonacci extensions/projections.
Fibonacci projection, also known as fibonacci extension, provides price targets that goes beyond the total retracement predicted earlier. The fibonacci projection level is calculated by adding 100% to the standard fibonacci levels. So, if your price target was below a hundred percent before, and the price exceeds it, all you need to do is calculate the fibonacci projection simply by adding a 100% to the standard levels.