Fibonacci support and resistance are levels under the Fibonacci retracement platform. They show the lowest or the highest the price of a commodity can go on the chart as displayed on a chart. With it, traders can make profitable trade decisions and avoid risk to its minimal.
THE SUPPORT LEVEL:
The support level is the lowest low a commodity price can get to before it changes course and starts going any other direction asides below the support mark. With an established support level, a trade can be managed by a forex trader with expectations; the basic one being that the price of the commodity cannot fall below the support level. However, if there is a huge change and the price happens to change, the next level of support can be anticipated with fibonacci calculations.
THE RESISTANCE LEVEL:
The resistance level is the highest high the price of a commodity can go before changing course. The price either remains at that course or it comes down. While trading, traders have it in mind that price movement will hardly go above the already established resistance level; and it works for them. However, there will come a time when the resistance level will be exceeded. At this point, there is no resistance level, and a trader is exposed to more risk that before.
However, it is important to note that a trend movement is not a fixed rule; for support and resistance to work very perfectly, they must be in a confirmed trend and this does not happen always. Using each level as a target plan, an easier method of making use of the extension levels is just to exit when the price in the market seems to find significant support or resistance in it. Otherwise put, if the price to have trouble breaking hard from a Fibonacci level, then exit is a good plan.
THE FIBONACCI GOLDEN RATIO
This is a special ratio that can be used to describe the proportions of everything from the building block of such as atoms and to other rudimentary part of matter to the most advanced units in the universe, such as wondrous large celestial bodies and entities. Life relies on this inborn proportion to maintain stability and balance, but the financialmarkets also align to the objectives and proportions given by the golden ratio.
This is the most interesting part of Fibonacci numbers or numbering system, especially for traders. If any two successive Fibonacci Numbers from a particular point is picked, their ratio is determined very close to the Golden Ratio “φ” which is approximately 1.618034. Forex commodities are in the golden ratio if their ratio is the same as the ratio of their sum to the larger of the two currencies considered as in forex commodities. The inverse of 1.618034 is 0.618034.The larger the pair of Fibonacci Numbers, the closer the approximation. Approximation is applied when the value of a FOREX commodity is highly placed. This helps in managing of the forex trends and market.
APPLICATION OF GOLDEN RATIO TO FOREX SUPPORT AND RESISTANCE
The golden ratio has several applications in forex. It is not restricted to any part of nature or biological system as it can be used in forex too. Its applications help one to appreciate the awesomeness of utilising the Fibonacci system.
When a pair of currency is considered using the golden ratio, the average profitability of one of the currencies involved is calculated and known. This indicates if there should be a support or resistance to the entry or exit of a trader to the market.
Assuming the golden ratio is high, the support of entry into the market is also high. This profit makes a trader happy doing investment on forex.It also encourages potential traders to join the investment move.
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