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Fibonacci retracements are some of the most crucial technical indicators that have attracted millions for many forex traders. Using the magical patterns can help you determine the best time to trade the forex currency pairs.
Before understanding how to use Fibonacci Retracements in Forex, it would to first find out their backgrounds.
For instance, what are Fibonacci retracements? How do you calculate and use them? What are their strengths and weaknesses?
Reading this article will answer all the above questions. You will then trade wisely and boost your forex trading profits by more than 59.7%. What is more?
Read on to find out.
What Is Fibonacci Retracement in Forex?
Here is what you need to understand about the unique numbers before exploiting their potential before defining Fibonacci retracement in forex.
Retracements are short-term price corrections (temporary price reversals) during an overall larger. They do not necessarily mean a change in the larger trend direction.
The genesis of Fibonacci retracements dates back to the 13th century when a mathematician, Leonardo Pisa, invented the mathematical pattern of certain natural numbers.
Later referred to as Leonardo Fibonacci, Leonardo Pisa deduced a pattern, where adding two previous in a series of natural numbers led to a unique pattern that influences nature. Here is the pattern:
1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144 …
From the pattern 0 + 1 = 1, 1 + 1 = 2, 2 + 1 = 3, 3 + 2 = 5, 5 + 3 = 8 … and the pattern continues.
Addition, multiplication and division of the numbers has solved many computer science, mathematical, biological, and finance challenges.
Let us see how the Fibonacci retracements work in finance.
How Do You Calculate Fibonacci Retracements?
Dividing consecutive numbers in the series (most after 21) averages to 0.618. For example, 100 (21 / 34) = 61.8%
Dividing a number in the series by another situated two spots to the right averages to 0.618. For example, 100 (21 / 55) = 38.2%.
Dividing a number in the series by another situated three spots to the right averages to 0.618. For example, 100 (21 / 89) = 23.6%.
These percentages, 23.6%, 38.2%, 50%, 61.8%, become Fibonacci retracements. And are critical in determining pullback points in forex trading charts.
Here is how they work.
First, collect the chart(s) you want to study. Find the highest and lowest swing points on the chart.
Draw a line joining the two points. Segment the line into horizontal portions of the equivalent Fibonacci ratios.
How to Use Fibonacci Retracement in Forex
The Fibonacci ratios denote resistance or support points on either uptrend or downtrend.
During the resistance, the currency pair price reverses as the number of sellers increase. On the other hand, the prices will stop falling as the number of buyers increase.
Enter or exit the market when the price hits one of the Fibonacci horizontal lines (Fibonacci ratios).
Strengths
Miraculously, most traders who master the resistance and support levels buy and sell forex currency pairs at the most appropriate time, earn millions from the forex market.
The tools (Fibonacci extensions) help you determine how long the price will continue after the retracement.
If you are wondering, “Which timeframe is best for Fibonacci retracement?” Any time of the day is appropriate as long as you master the high/low swings.
Most successful traders recommend combining Fibonacci retracements with other technical indicators and oscillators such as MACD, RSI, ADX and Bollinger Bands.
Why? Because of the Fibonacci Retracements weaknesses.
Weaknesses
Although using the ratios enables many traders to know when to trade profitably, no guarantee using the indicators will lead to a 100% success rate. This is because there is no logical proof of their relevance in trend determination.
Meaning the indicators are not completely independent. It would be best to combine them with other trends, volume and momentum indicators before entering or exiting a market.
Conclusion
Besides application in biological, computer science and Mathematical patterns, Fibonacci ratios are crucial in forex trading.
They help you determine resistance and support levels during uptrend and downtrends, helping you set take profit, stop-loss, exit and enter a market at the perfect moment.
