Forex trading using Fibonacci is the act of trading in the foreign exchange market using Fibonacci sequence. Forex trading using Fibonacci is considered a predictive technical indicator providing feedback on possible future exchange rate levels. Great number of foreign exchange market trader can stick their neck in favor of the accuracy to which the Fibonacci Retracement can predict future rates. In spite of the many foreign exchange market traders for testimonies for the advantages of forex trading using Fibonacci, some trader still argue that Fibonacci numbers are more art than science. In Forex trading using Fibonacci, the following is going to be considered:
THE FIBONACCI SEQUENCE
The Fibonacci sequence was discovered by 13th century mathematician called Leonardo Fibonacci. The Fibonacci sequence is a series of numbers that occur consistently in nature. In order to calculate Fibonacci sequence, add any Fibonacci number together with the number that immediately precedes it in the sequence. Using this formula and assuming that the first two numbers are zero and one, it is possible to calculate the first ten numbers in the Fibonacci sequence as follows:
0 + 0 = 0
0 + 1 = 1
1 + 0 = 1
1 + 1 = 2
2 + 1 = 3
3 + 2 = 5
5 + 3 = 8
8 + 5 = 13
13 + 8 = 21
21 + 13 = 34
From the above, it will be observed that the first ten numbers in the Fibonacci sequence are 0, 1, 1, 2, 3, 5, 8, 13, 21, and 34.
There are series of ratios from the Fibonacci sequence. These are the ratios that are of special importance to the traders. The most important Fibonacci ratio is 61.8%.
Sometimes, this ratio of 61.8% is referred as “the golden ratio” or “the golden mean”. This golden ratio or golden mean is accepted as the most “reliable” retracement ratio. The golden mean or golden ratio is gotten by dividing any number in the sequence by the number that immediately follows it. The answer will always be very close to the man average of 0.688 or 61.8% no matter which number one chooses. For example:
8 divided by 13 = 0.615 = 61.5%
13 divided by 21 = 0.619 = 61.9%
21 divided by 34 = 0.617 = 61.7%
In forex trading using the Fibonacci, two other Fibonacci ratios are also used. They are: 38.2% and23.6%. These two ratios have a lower level of success, but are still included for analysis purposes. By dividing the any number in the sequence by the number sound two places to the right, the 38.2% ratio is derived. For example:
8 divided by 21 = 0.380 = 38%
144 divided by 377 = 0.381 = 38.1%
6765 divided by 17716 = 0.381 = 38.1%
The 23.6% ratio in a similar fashion is gotten by dividing any number in the sequence by the number that is three places to the right. For example
5 divided by 21 = 0.238 = 23.8%
34 divided by 144 = 0.236 23.6%
6765 divided by 2866 = 0.235 = 23.5%
Most trading systems also show retracement levels at 50% and 100%. It is this series of ratios that are superimposed over a price chart of Fibonacci Retracement lines.
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