0, 1, 1, 2, 3, 5….. Do these numbers ring a bell or do they simply look gibberish? On careful observation, one will find that every 3rd number is precisely the sum of the first two. This goes on till infinity and is one of the series that is obtained naturally in the universal order of things. Leonardo Fibonacci identified these series centuries back and is regarded as an important sequence. Use of Fibonacci in Forex trading started ever since experts tried finding ratios that matter.
Dividing every number by its subsequent higher number, one gets a simple ratio which counts to .618. Accordingly, ratio between two alternate digits counts to .382 and so on. .618 is known as the golden ratio and from this one can obtain retracement and extension levels that traders find useful.
Details of usage of Fibonacci in Forex trading:
Traders deal with highly fluctuating nature of currencies which transform as market reacts. Unlike other forms of market, Forex is extremely volatile, and this calls for the need to get into the nitty-gritties with precision. Once the market is closing in on a major support or resistance level, traders need to identify the point and find suitable entry points.
For this, they use certain ratios and draw lines from these values thus forming a band. Price movements within this band give traders an idea of the possibility of price levels to return to normalcy.
Using Fibonacci retracement levels:
Often markets react more violently with sudden up or down movements. Traders consider it important to react to these levels depending on the market movement and other economic factors. But they need a pathway for the same. Determining locus points while Forex trading with Fibonacci is not an easy task.
Although practice and experience counts, sometimes, it may turn out to be a reversal situation. This indicates that the market is about to recover from a blast or is heading towards one. Traders should choose their entry exit pints very carefully. Identifying support/resistance levels from Fibo series hints a lot on future trends.
Identifying high and low levels:
While dealing with exchange rate fluctuations, traders often look for the most profitable momentum. Fibonacci in Forex trading can predict with precision the future resistance levels for each currency pairs.
• Detect a swing high by the presence of recent highs with two lower high on left and two higher high on the right. This alternate pattern is the head-shoulder pattern.
• Similarly, swing lows are obtainable with higher lows on either side, and thus it forms a typical reverse Head-shoulders pattern.
Setting stop losses for retracements:
The swing rate determines the level at which traders should place their stop loss limits. One should carefully notice the level of previous support levels before diving right in. in order to minimize potential losses; traders should try setting stop loss below the support level. Determine your choice of positioning accordingly.
To sum up, traders should notice the extreme positions before making a particular choice. Prices will eventually swing back to normal. Trigger stop losses when prices rise or fall above estimated level within Fibonacci in Forex trading.
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.