Magic On the Exchange Floor: The Fibonacci Sequence in Forex Trading

Successful traders on the stock market are looked upon as being somewhere near the level of wizards in investment circles, and so it follows that there are some technical analysis methods that many consider to border on the supernatural. The Fibonacci method is one such analysis method applied by traders. Hundreds of years ago, the Fibonacci hypothesis was formulated by one of the time’s leading mathematical minds, Leonardo de Pisa, and it has held up well through the years up to date as an effective tool in any trader’s arsenal.

This somewhat exceptional analysis tool is used in combination with the golden ratio, which makes use of the sequence to derive the significant ratio represented by the figure 1.618. Traders make use of these somewhat random looking figures to help them identify resistance and support levels on trading charts, which is why Fibonacci forex trading applications are so prevalent. The method basically aids in the identification of where fluctuating holdings might reverse their courses based on measurements of the most recent fluctuations on the chart.

Why Fibonacci forex trading methods work isn’t really all that mysterious, but is rather an interesting example of human psychology and the way our society functions. See the method works simply because so many people use it – meaning that it’s a sort of self-fulfilling prophecy whereby traders watching out for the relevant Fibonacci support and resistance levels and trading on the strength of them actually make them come true’.

The sequence itself is derived this away: 0,1,2,3,4,5,8,13,21,34,55,89, and so on. You’ll notice that each number can be found by adding up the previous two ahead of it. Further scrutiny of the sequence reveals that each number in the line is 1.618 times greater than the one preceding it. It’s pretty neat. If you’re interested in the history of the sequence, you should look it up, as it makes for some interesting reading. Right now, we’re going to take a step-by-step look at just how Fibonacci forex traders make use of the method to inform their trading actions.

Fibonacci Forex Trading

Forex traders, being well aware of the fact that their holdings never rise or fall in perfectly straight lines, but rather rally, retrace, and then continue the general trend, found a way to predict when the next price retracement will take place. These points are what the Fibonacci levels indicate.

They can be made use of with a wide variety of trading strategies, and can actually be custom-designed by individual traders to reflect their risk appetite and trading objectives.

Step 1: Setting Fibonacci Levels

Most trading platforms will have preset Fibonacci measuring tools such as the Fibonacci spiral, Fibonacci arcs, and others, with the retracement tool being by far the most relevant and useful one among them when it comes to Fibonacci forex trading. This plots a line extending from the end point of a strong decline or rally in the relevant holding to the beginning of the trend.

A properly plotted line will indicate the values correlating to 0 and 100 on the axis indicating 0.382 and 0.618. You will have the option of adjusting the levels yourself, but this is better left until one has a better grasp of just how the method works.

Step 2: Making the Trade

Fibonacci forex traders will at this point wait for a reversal to occur at either the 0.618 or o.382 ratio level (support and resistance levels, or Fibonacci levels). When dealing with up-trending holdings, these levels are support levels, while in downtrends they represent resistance levels.

Now, at this retracement level, you can expect the price to either reverse or even out before changing direction. The usual eventuality expected is for the prices to then rally up to the 1.618 point, which is referred to in forex trading as the Fibonacci extension level.

Common practice among traders is to either take sell or buy when prices hover around the Fibonacci retracement point and set their Take Profit option at the Fibonacci extension level.

In Conclusion

That’s all there is to it, basically speaking. There are plenty of variations to what we’ve gone through above, depending on what an individual trader’s game-plan is. Whichever market is in question, the method can be applied in some way as long as strong upward or downward movements exist. The most important quality Fibonacci forex traders need to put the method to its greatest use is the patience to wait for high-low pivots to properly form before taking action.

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