How to Use Fibonacci Retracements?
Forex traders use Fibonacci ratios to determine future levels of support and resistance based on previous moves in the currency markets. In other words, previous moves in the market determine where the Fibonacci levels will be placed.
Fibonacci analysis is an exercise in identifying and determining the support and resistance during both the trend retracement and the trend continuations. It is based on a series of numbers and ratios derived from the Fibonacci sequence. This remarkable sequence was discovered by an Italian mathematician Leonardo Pisano.
The sequence starts with 0, 1 and 1. The next number in the sequence is determined by adding the previous two numbers. For example, if you take the first two numbers 0 &1, the next number will be 0+1=1. If you take the next two recent numbers, 1 & 1, the next number will be 1+1=2. So the Fibonacci sequence takes shape like this: 0,1,1,2,3,5,8,13,21,34,55.
The fascinating thing about this sequence is that the ratio of numbers at specified intervals is consistently the same, no matter how high you go. Fibonacci sequence gives us two very important ratios. These two ratios appear over and over again in nature such as shells, pine cones, sunflowers etc. These two ratios also appear in currency markets.
The first ratio, 38.2%, is calculated by dividing any number in the Fibonacci sequence by the number two places higher in the sequence. For example, in the above Fibonacci sequence, divide 21 by 55 (two places higher) you get 21/55=38.2%.
The second important ratio is 61.8% obtained by dividing any number in the Fibonacci sequence by the next number in the sequence. For example, divide 34 by 55 (the next number), you get 34/54=61.8%.
Forex market trends dont go exactly in a straight line, up trends never go straight up and down trends never go straight down. The price will always trace along the way as buyers and sellers enter and exit the markets, the important question in every investors mind is how far these retracements will penetrate into the previous price movements. This is where the Fibonacci ratios are extensively applied and used.
Most forex traders use the three additional ratios of 0%, 50% and 100% in conjunction with the two primary Fibonacci ratios to round out the retracement analysis tools. Two secondary Fibonacci ratios, 161.8% and 261.8% are also used in the trend continuation projections. The ratio 161.8% is obtained by dividing any number in the sequence by the number preceding it. For example, in the above sequence dividing 55 by 34 gives 55/34=161.8%. Similarly the ratio 261.8% is obtained by dividing any number in the sequence by the two preceding it. For example, divide 55 by 21, you will get 55/21=261.8%.
Fibonacci ratios are used by investors in making entry and exit decisions for each trade. The first ratio 38.2% is used as an entry point in a trending market and the ratio 0% as the exit point. The important question that you may ask is why markets react to these levels. You should not forget, markets are just investors buying and selling. So if many investors start believing in a thing, it becomes a self fulfilling prophecy. As most of the investors use Fibonacci ratios in placing there entry and exit targets, the markets starts reacting to these levels. - 23167
Fibonacci analysis is an exercise in identifying and determining the support and resistance during both the trend retracement and the trend continuations. It is based on a series of numbers and ratios derived from the Fibonacci sequence. This remarkable sequence was discovered by an Italian mathematician Leonardo Pisano.
The sequence starts with 0, 1 and 1. The next number in the sequence is determined by adding the previous two numbers. For example, if you take the first two numbers 0 &1, the next number will be 0+1=1. If you take the next two recent numbers, 1 & 1, the next number will be 1+1=2. So the Fibonacci sequence takes shape like this: 0,1,1,2,3,5,8,13,21,34,55.
The fascinating thing about this sequence is that the ratio of numbers at specified intervals is consistently the same, no matter how high you go. Fibonacci sequence gives us two very important ratios. These two ratios appear over and over again in nature such as shells, pine cones, sunflowers etc. These two ratios also appear in currency markets.
The first ratio, 38.2%, is calculated by dividing any number in the Fibonacci sequence by the number two places higher in the sequence. For example, in the above Fibonacci sequence, divide 21 by 55 (two places higher) you get 21/55=38.2%.
The second important ratio is 61.8% obtained by dividing any number in the Fibonacci sequence by the next number in the sequence. For example, divide 34 by 55 (the next number), you get 34/54=61.8%.
Forex market trends dont go exactly in a straight line, up trends never go straight up and down trends never go straight down. The price will always trace along the way as buyers and sellers enter and exit the markets, the important question in every investors mind is how far these retracements will penetrate into the previous price movements. This is where the Fibonacci ratios are extensively applied and used.
Most forex traders use the three additional ratios of 0%, 50% and 100% in conjunction with the two primary Fibonacci ratios to round out the retracement analysis tools. Two secondary Fibonacci ratios, 161.8% and 261.8% are also used in the trend continuation projections. The ratio 161.8% is obtained by dividing any number in the sequence by the number preceding it. For example, in the above sequence dividing 55 by 34 gives 55/34=161.8%. Similarly the ratio 261.8% is obtained by dividing any number in the sequence by the two preceding it. For example, divide 55 by 21, you will get 55/21=261.8%.
Fibonacci ratios are used by investors in making entry and exit decisions for each trade. The first ratio 38.2% is used as an entry point in a trending market and the ratio 0% as the exit point. The important question that you may ask is why markets react to these levels. You should not forget, markets are just investors buying and selling. So if many investors start believing in a thing, it becomes a self fulfilling prophecy. As most of the investors use Fibonacci ratios in placing there entry and exit targets, the markets starts reacting to these levels. - 23167
About the Author:
Mr. Ahmad Hassam has done Masters from Harvard University. He is interested in day trading and swing trading stocks and currencies. Learn Forex Nitty Gritty. Read about Trend Forex System. Try Netpicks Forex Signal Service.
posted by X - Men @ 5:54 AM
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