Forex trading with Fibonacci sequence is the act of using Fibonacci sequence to trade in the foreign exchange market. Forex trading with Fibonacci sequence is becoming more popular nowadays because foreign exchange market traders have learnt that forex and stock market react to the Fibonacci numbers. Before discussing forex trading with Fibonacci sequence, it is important that one understand what Fibonacci sequence is. In this article, the following shall be discussed:
Fibonacci number sequence
Forex trading with Fibonacci sequence
FIBONACCI NUMBER SEQUENCE
Fibonacci number sequence is first discovered by and Italian mathematician called Leonardo Fibonacci. Fibonacci number sequence is a series of numbers that consistently occur in nature. Although the Fibonacci number sequence is credited to 13th century Italian mathematician, it still has many applications in this modern age. Elliot wave theory is most popular Fibonacci-based investment system used nowadays. The process or method of calculating the Fibonacci number sequence is to add any Fibonacci number together with the number that immediately precedes it in the sequence. Assuming the first two numbers are zero and one, it is possible to calculate the first five numbers. The method is as shown below:
0 + 0 = 0
0 + 1 = 1
1 + 0 = 1
1 + 1 = 2
2 + 1 = 3
FOREX TRADING WITH FIBONACCI SEQUENCE
In considering forex trading with Fibonacci sequence, the following is going to be considered:
The Fibonacci ratios
Using Fibonacci retracement lines to predict future rates
THE FIBONACCI RATIOS
There are series of ratios that come from the Fibonacci number sequence. These ratios are of special interest to traders. 61.8% is the most important Fibonacci ratio. This 61.8% ratio is sometimes referred to as the “golden ratio” or “golden mean”. The golden ratio or the golden mean is accepted as the most “reliable” retracement ratio. The golden mean is gotten by dividing any number in the Fibonacci number sequence by the number that immediately follows it. The answer will always be very close to the mean average of 0.618, or 61.8% no matter which number one chooses. For example:
8 ÷ 13 = 0.615 = 61.5%
13 ÷ 21 = 0.615%
21 ÷ 34 = 0.617%
38.2% and 23.6% are the other two Fibonacci ratios that forex traders use. These two ratios are included for analysis purposes although they have lower level of success.
The 38.2% ratio is gotten by dividing any number in the sequence by the number found two places to the right. For example:
8 ÷ 21 = 0.380 = 38.0%
144 ÷ 377 = 0.381 = 38.1%
6765 ÷ 17716 = 0.382 = 38.1%
Similarly the 23.6% ratio consists of any number in the sequence divided by the number that is three places to the right.
Most trading systems show retracement levels at 50% and 100% in addition to the other ratios discussed above. It is this series of ratios that are superimposed over a price chart in Fibonacci retracement lines
USING FIBONACCI RETRACEMENT LINES TO PREDICT FUTURE RATES:
The Fibonacci retracements attempt to identify a future exchange rate and are considered as a predictive technical indicator. The foreign exchange market trader’s discretion is advised when he or she is using Fibonacci retracements as a technical indicator.
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.