Learn to Use Fibonacci Retracements
Forex traders use Fibonacci ratios to determine future levels of support and resistance based on previous moves in the currency markets. In other words, previous moves in the market determine where the Fibonacci levels will be placed.
Fibonacci analysis is used in determining and identifying the support and resistance levels during both the trend retracement and the trend continuations. It is based on a number of ratios derived from the Fibonacci sequence. This interesting and remarkable sequence was discovered by an Italian mathematician Leonardo Pisano in the 13th century.
The sequence starts with 0, 1 and 1. The next number in the sequence is determined by adding the previous two numbers. For example, if you take the first two numbers 0 &1, the next number will be 0+1=1. If you take the next two recent numbers, 1 & 1, the next number will be 1+1=2. So the Fibonacci sequence takes shape like this: 0,1,1,2,3,5,8,13,21,34,55.
The remarkable thing about this sequence is that the ratio of number at specific intervals would consistently be the same, no matter how high you count the numbers. Fibonacci sequence gives us two very important ratios. These two ratios appear over and over again in nature such as sunflowers, shells, pine cones etc. These two ratios also appear in forex markets.
The first ratio is 38.2%. It is calculated by dividing any number in the Fibonacci sequence by the number two places higher in the sequence. For example, in the above Fibonacci sequence, divide 21 by 55 (55 is two places higher than 21) you get 21/55=38.2%.
The second important ratio is 61.8% obtained by dividing any number in the Fibonacci sequence by the next number in the sequence. 55 is the next number after 34. Divide 34 by 55 you get 34/54=61.8%.
Forex market trends dont go exactly in a straight line, up trends never go straight up and down trends never go straight down. The price will always trace along the way as buyers and sellers enter and exit the markets, the important question in every investors mind is how far these retracements will penetrate into the previous price movements. This is where the Fibonacci ratios are extensively applied and used.
Most investors use the three additional ratios of 0%, 50% and 100% in conjunction with the two primary Fibonacci ratios to round out the retracement analysis tools. Two secondary Fibonacci ratios (161.8% and 261.8%) are also used in the trend continuation projections. The secondary ratio 161.8% is obtained by dividing any number in the sequence by the number preceding it. In the sequence dividing 55 by 34 gives 55/34=161.8%. Similarly the ratio 261.8% is obtained by dividing any number in the sequence by the two numbers preceding it. Divide 55 by 21, you will get 55/21=261.8%.
These ratios are used by forex traders in making entry and exit decisions. The ratio 38.2% is used as an entry point in a trending market and the ratio 0% as the exit point. The important question is why markets react to these levels. Dont forget, markets are just people buying and selling. So if many people start believing in a thing, it becomes a self fulfilling prophecy. Since most of the traders use Fibonacci ratios in setting their entry and exit targets, the markets starts reacting to these levels. - 23200
Fibonacci analysis is used in determining and identifying the support and resistance levels during both the trend retracement and the trend continuations. It is based on a number of ratios derived from the Fibonacci sequence. This interesting and remarkable sequence was discovered by an Italian mathematician Leonardo Pisano in the 13th century.
The sequence starts with 0, 1 and 1. The next number in the sequence is determined by adding the previous two numbers. For example, if you take the first two numbers 0 &1, the next number will be 0+1=1. If you take the next two recent numbers, 1 & 1, the next number will be 1+1=2. So the Fibonacci sequence takes shape like this: 0,1,1,2,3,5,8,13,21,34,55.
The remarkable thing about this sequence is that the ratio of number at specific intervals would consistently be the same, no matter how high you count the numbers. Fibonacci sequence gives us two very important ratios. These two ratios appear over and over again in nature such as sunflowers, shells, pine cones etc. These two ratios also appear in forex markets.
The first ratio is 38.2%. It is calculated by dividing any number in the Fibonacci sequence by the number two places higher in the sequence. For example, in the above Fibonacci sequence, divide 21 by 55 (55 is two places higher than 21) you get 21/55=38.2%.
The second important ratio is 61.8% obtained by dividing any number in the Fibonacci sequence by the next number in the sequence. 55 is the next number after 34. Divide 34 by 55 you get 34/54=61.8%.
Forex market trends dont go exactly in a straight line, up trends never go straight up and down trends never go straight down. The price will always trace along the way as buyers and sellers enter and exit the markets, the important question in every investors mind is how far these retracements will penetrate into the previous price movements. This is where the Fibonacci ratios are extensively applied and used.
Most investors use the three additional ratios of 0%, 50% and 100% in conjunction with the two primary Fibonacci ratios to round out the retracement analysis tools. Two secondary Fibonacci ratios (161.8% and 261.8%) are also used in the trend continuation projections. The secondary ratio 161.8% is obtained by dividing any number in the sequence by the number preceding it. In the sequence dividing 55 by 34 gives 55/34=161.8%. Similarly the ratio 261.8% is obtained by dividing any number in the sequence by the two numbers preceding it. Divide 55 by 21, you will get 55/21=261.8%.
These ratios are used by forex traders in making entry and exit decisions. The ratio 38.2% is used as an entry point in a trending market and the ratio 0% as the exit point. The important question is why markets react to these levels. Dont forget, markets are just people buying and selling. So if many people start believing in a thing, it becomes a self fulfilling prophecy. Since most of the traders use Fibonacci ratios in setting their entry and exit targets, the markets starts reacting to these levels. - 23200
About the Author:
Mr. Ahmad Hassam is a Harvard University Graduate. He is interested in day trading and swing trading stocks and currencies. Learn Forex Nitty Gritty. Read about Trend Forex System. Try Netpicks Forex Signal Service.
posted by X - Men @ 6:14 AM
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