Forex trading: Fibonacci retracements

Fibonacci: How to use

Fibonacci retracements are a trading tool. It is based on extremely specific mathematical relationships - ratios between numbers and series of numbers.

The number Phi itself was discovered by Leonardo Fibonacci back in the 13th century. The Fibonacci sequence is a progression in which each next number is equal to the sum of the two previous numbers. The Phi number is called the golden ratio or perfect proportion. It can be used almost anywhere. Including technical analysis.

What for

Fibonacci retracements show that market trends tend to pull back from previous chart movements based on certain ratios. Typically, price retracements occur at 23.6% 38.2% 50% 61.8% and 100% of the previous trend movement.

If the downtrend ends and price rises, we say it is correcting. The main trend may remain downtrending, but the price will still pause and reverse. And sometimes even for a long time. At the same time, the price may recover 23.6% 38.2% 50% 61.8% or 100% of the upward trend.

Correction levels help to predict future price movements. They are also useful if you want to find levels where price may stop or reverse.

There is no specific explanation why trends correct at these levels. This is why using Fibonacci retracements can be difficult at first. Nevertheless, this tool works. Traders everywhere use Fibonacci levels as support and resistance levels.

How to use

Many traders use Fibonacci retracements to make buying and selling decisions in the Forex market. The most popular ones are 32.8%, 50% and 61.8%. This is the way it has historically worked out. The psychology of the market is such that it reacts strongly when the price rolls back to these levels.
These indicators are derived from the Fibonacci sequence. The sequence starts from 0, the first two numbers are 0 and 1. To get the next number, we add 0 and 1, this gives 1. The beginning of the sequence looks like this: 0, 1, 1, 2, 3, 5, 8, 8, 13, 21, 34, 55, 89.
The most important thing about this sequence is that if we divide one number by another, we get 61.8%. Similarly, if you divide one number by the two numbers in front, you get 38.2%.
These ratios are present everywhere in nature, but they are also found in the financial markets. In fact, the Belkhayate Center of Gravity technical indicator is based on the golden ratio theory (1.618), which is directly related to Fibonacci ratios.
Speculating with these ratios is actually quite easy. In Forex trading, when a new trend movement starts, you divide the previous trend movement into 6 horizontal levels: 0%, 23.6%, 38.2%, 50%, 61.8% and 100%. Trading platforms such as MT4 available from Forex brokers include a tool that allows you to plot all these levels in seconds.

Once the Fibonacci retracements are plotted on the chart, all that is left to do is wait for price to break one of them and show signs of reversal before opening a position.

Like any technical indicator and any trading strategy, Fibonacci retracements do not give 100% winning signals, so it is recommended to use them in combination with other technical indicators to harmonize the signals and make a more relevant analysis.


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