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As a forex trader, something which you will doubtless encounter at many points throughout your trading career is Fibonacci retracements. These are a key technical indicator used to identify levels of support and resistance. It is one of the most fundamental and simplistic charting techniques which can be easily implemented by all levels of forex trader.
The History and Fundamentals of Fibonacci Retracement
Fibonacci retracement is based on a sequence of key numbers which were identified in the 13th century by the Italian mathematician, Leonardo Fibonacci. This number sequence and specifically the relationship of the numbers to each other when expressed as a ratio are a key to identifying support and resistance levels in trading.
The sequence of numbers set out by Fibonacci, and adapted by modern mathematicians is 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, and so on. As we can see from a more detailed analysis, each number is the sum of the two preceding numbers. This continues infinitely and is key to deducing the ratios used in retracement.
The Fibonacci ratios are, 23.6%, 38.2%, 50%, 61.8% and 100%. These are used hen dividing the vertical distances on a chart between two points to create a Fibonacci retracement. The “Golden Ratio” is derived by dividing one number in the sequence by its following number. This will always equal approximately 0.618. The other key points are derived in a similar fashion.
Top forex traders who engage in technical analysis, will plot these lines horizontally across a chart in order to identify the key points of support, where the market may retrace to, and levels of resistance which may be reached in future movements...
Conclusion
Ultimately, whether or not traders choose to agree on its effectiveness, Fibonacci retracement is one of the most implemented technical analysis techniques among forex traders today. Within any high-quality forex trading educational program, it is one of the fundamental tools which you will learn how to use.
With a solid foundation in Fibonacci retracement, you can set yourself up to continue learning about other more advanced technical analysis tools. This is a learning process, which, regardless of how you feel about it, can only enhance your knowledge and potential to emerge profitably from the lucrative forex market.
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Source: Forex Crunch
