How effective are retracement levels in identifying trade prospects depends on your ability to understand and utilize? Day/swing traders often use fibo numbers in understanding the pattern of price movements within a specific time interval. It lays stress on certain important formats like Fibo arcs, channels, and expansions which further your research into price movement. Fibonacci Forex retracement has a dramatic influence on Forex markets and traders often consider it as an improvement over typical lagging indicators.
However, the effectiveness of Golden and other ratios in correct determination of price movements is still questionable. It assists traders in throwing effective stop loss movements and place target stops. Retracement also finds application in several other indicators like Elliott Wave theory and Oscillatory Forex movements.
The importance of ratios in determining support/resistance levels:
Fibonacci Forex retracement ratios play a major role in determining significant information about the Forex market. It follows the sequence originally found in nature, and this helps determine price movements. What can cause an asset price to rise or fall can be detected with perfection using these ratios.
There are certain periods or levels at which these retracements occur. A periodic flow of price along a definite trend might break at the onset of some major economic disaster/boom. In either case, price will fluctuate till the breakeven point. Beyond this, it will retrace back, the level of which is determinable by 3 main ratios – 61.8%, 50%, and 38.2%.
• In case of uptrends:
Your choice of positioning will depend on price swing levels. To keep it simple, one should consider opting for a long position (buy) in case of market trending upwards and vice versa. Starting from a swing low, when prices start soaring high quite above 38.2% beyond the swing high, traders might consider selling. This calls for profitable terms.
• In the case of downtrends:
Imagine the scenario when prices are soaring down beyond swing high all the way to swing low, with occasional Fibo levels intersecting them. This calls for selling at those regions and buying beyond. Thus 61.8% retracements Fibonacci Forex will mean a steeper fall. A number of pips available for these regions is high. Temporary support/resistance levels aid further.
1. Fibo Arcs:
Even with Fibonacci Forex retracement levels to guide traders in their venture, sometimes they need a nearly rough estimate of support and resistance levels. To aid in this, arcs are named, 3 in number at the intersection of the peak-to-trough connector and retracement levels. These are potential support and resistance levels for short periods. They change their position rapidly in response to the price movement.
2. Fibo Fan:
If you join the trend lines from one extreme to another and draw imaginary lines connecting the next extremes, you will find a fan-like illustration.It cuts the retracement levels from below and is potential support and resistance. Precision to further forecasting comes with usage of absolute Fibonacci technics.
Fibonacci Forex retracement provides a fairly sharp estimate to the movement of prices. Irrespective of the time frame one is dealing with, retracement levels can most accurately show the pathway to worthy buying/selling positions.
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.