The Hindu-Arabic numeric system was introduced by Leonardo Fibonacci, an Italian mathematician from Pisa. He also introduced a significant series of figures known as the Fibonacci numbers.
The ratio between the numbers in this sequence is valuable for financial markets. For example, many traders use Fibonacci ratios to assess support and resistance levels in their forex trading tactics.
Each number in the Fibonacci sequence is computed by adding the two preceding integers.
1 1 2 3 5 8 13 21 34 55 89 144 233 377 and so on to infinity.
This pattern’s significance is that the ratio of any number to the following number in the series tends to equal 0.618.
As, 233 / 377 = 0.618
Furthermore, each number’s ratio to the number two places ahead in the sequence is always 0.382.
144 / 377 = 0.382
These are frequently referred to as Fibonacci ratios.
When these Fibonacci ratios are divided, the result is either 0.618 or 0.382.
- 0.236 / 0.382 = 0.618
- 0.382 / 0.618 = 0.618
- 0.236 / 0.618 = 0.382
These ratios are often known as retracement levels in trading. Traders wait for prices to approach these Fibonacci levels before acting by their plan. Then, before establishing trades, they usually check for a reversal signal on these highly observed retracement levels.
Fibonacci retracement levels
Drawing Fibonacci retracement levels is a straightforward three-step procedure:
In an uptrend
1. Determine the market’s direction: uptrend
2. Attach the Fibonacci retracement tool at the bottom and slide it to the right, all the way to the top.
3. Keep an eye on the three potential degrees of assistance: 0.382, 0.236, and 0.618
In a downtrend
1. Determine the market’s direction: downtrend
2. Attach the Fibonacci retracement tool to the top and drag it to the right and down.
3. Keep an eye on the three probable resistance levels: 0.382, 0.236, and 0.618
Forex Trading Strategies Using Fibonacci Levels
Forex Fibonacci retracement levels are shown on a chart by taking the high and low points and highlighting the critical Fibonacci ratios of 23.6 percent, 38.2 percent, and 61.8 percent horizontally in a grid. They can also identify significant levels of support and resistance.
Retracements are often determined after the market has moved dramatically, either up or down, and appears to have leveled out at a specific price level.
It may be pretty exponential when a market reaches critical price support or resistance level.
The 50% retracement level is typically included in the Fibonacci level grid.
It is not based on a Fibonacci number but is commonly acknowledged as a significant turning point.
Forex Fibonacci retracements frequently define crucial support and resistance levels and may be pretty accurate.
The Fibonacci trading technique is based on factual facts, and if you follow their approach, emotional involvement should be minimal.
Fibonacci retracement levels frequently and uncannily predict reversal points. However, they are tougher to trade than they appear in retrospect. Therefore, these levels work best as a tool inside a larger plan.
P.s. Technical points have been noted from: https://www.youtube.com/watch?v=r9SpkG1P0h0 and https://www.fxcc.com/fibonacci-forex-strategy