Who is Fibonacci?
Leonardo Pisano an Italian mathematician, was born in Pisa around 1170, he was popularly called Fibonacci. He was educated in North Africa and studied different numerical systems with different methods of calculation. He also travels round the world. He introduced the Fibonacci sequence to the West in the 13th century. These strings of numbers contain unique mathematical properties and ratios which can be found to this very day in nature, architecture and biology. It’s just one reason why many traders use a Fibonacci trading strategy to identify turning points in the market, and why you should consider it too.
In this article, you will learn the unique properties of the Fibonacci sequence in Forex trading, as well as how to use Fibonacci levels across different markets through a Fibonacci trading strategy. You will also learn specific techniques on trading Fibonacci by using Fibonacci retracement levels.
What is Fibonacci trading retracement?
The Fibonacci retracements are a technical tool used in Forex to define support and resistance levels. Based on a numerical series, the Fibonacci displays horizontal lines called retracements, which represent potential levels to place an order, a take profit or a stop loss.
How to Use Fibonacci Retracement Levels
When a stock is trending very strongly in one direction, the belief is that the pullback will amount to one of the percentages included within the Fibonacci retracement levels: 23.6, 38.2, 61.8, or 76.4. Some models also include 50%
For example, if a stock jumps from $10 to $11, the pullback should be expected to be approximately 23 cents, 38 cents, 50 cents, 62 cents, or 76 cents. Early or late in trends, when a price is still gaining or losing steam, it is more typical to see retracements of a higher percentage.
Understanding the Fibonacci sequence in Forex trading
The Fibonacci sequence is a sequence of numbers where, after 0 and 1, every number is the sum of the two previous numbers. This continues to infinity ;0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987, 1597, 2584, 4181, 6765….
There are some interesting relationships between these numbers that form the basis of Fibonacci numbers trading. While we cannot cover all of these relationships in this article, below are the most important ones you will need to know about when we look at a Forex Fibonacci trading strategy
How to use a Fibonacci trading strategy
in an uptrend Fibonacci retracement levels can act as a support level where price may bounce and continue moving higher. Conversely, in a downtrend Fibonacci retracement levels can act as a resistance level where price may bounce and correct lower. You have also learnt how to plot these levels using the Fibonacci indicator in the MetaTrader trading platform provided by Admiral Markets, as well as how to use Fibonacci extension levels.
As a trader, you should always have different tools available in your collection to analyze and trade the market. The Fibonacci and its retracement levels are good tools for you to use.