How To Profit From Fibonacci Retracements When Trading Forex
There are many different strategies that traders use to evaluate the trading patterns in Forex, and Fibonacci retracements is one of the most widely used (and profitable) ones. More generally, they fall within two primary techniques that are used by most successful traders: technical analysis and fundamental analysis Some traders will also use stochastic oscillators or moving averages as a way to spot trends in the markets. Others use a strategy that was built off of a numbers pattern that was invented back in the thirteenth century called the Fibonacci Series. Let me show you how to profit from Fibonacci Retracements when trading Forex.
Who is Fibonacci
Leonardo Fibonacci was a mathematician that lived in the thirteenth century. He was trying to create an equation to determine how many rabbits he could breed, when he stumbled upon a pattern that appeared in numbers. This pattern now carries his name and is known as the Fibonacci series. The sequence is based on the premise that any number in the series is the sum of the previous two numbers.
Fibonacci Retracement Explained
Today this pattern is known as the Fibonacci Retracement and it is used to determine both support levels and resistance levels. This technical analysis is based on the assumption that the Forex market will follow a predictable pattern and retrace a portion of a move before continuing in moving toward its original direction. Fibonacci Retracement uses ratios from the numbers in this “rabbit” series. You take two numbers in the series and divide them to create a ratio. There are several very important ratios used in technical analysis with this formula and they are 0.0%, 23.6%, 38.2%, 50%, 61.8% and 100%.
The ratio of 0.0% is considered the start of when the market retraces itself and the ratio of 100% marks when the market completely reverses its direction. These two points are referred to as the trough and the peak. Once these two points are identified in the trading patterns, then you start to identify possible support and resistance levels within a broader technical analysis. These points are identified using the ratios mentioned above.
Why Use Fibonacci Retracements
The purpose of any technical analysis is to identify trends and patterns that can be used to determine the optimal time to buy and sell currency on the market. There are many different strategies that traders use for technical analysis. Fibonacci Retracements are just one of the many strategies that can be used… It is based on the belief that the market will move in one direction and at set points will retrace its steps before continuing in its original direction. This strategy attempts to identify these points so you can trade them to your profit.
Fibonacci Retracements are an effective technical analysis strategy that you can use to profit from strong trends when trading forex. The ratios created can help you to determine when you should enter the market based on a set of numbers that naturally occur in nature, including financial markets. During the trend the market will retrace by a certain percentage point and that pullback is usually at one of the Fibonacci ratios. However, to fully profit from techniques such as Fibonacci retracements you need to understand other aspects of technical analysis as well.