How to use Fibonacci Retracement in Forex Trading ( 9 Suggestions )
First of all, you need to know about Fibonacci Retracement. General theories about Fibonacci ratios, which represent this title of our technical analysis section and whose various usage methods will be examined in different categories, are based on a simple number string.
In this number string, which Fibonacci explains in his book based on a problem related to the reproduction of a family of rabbits in a closed environment. In this stage, the number 1,618 is gradually approached. This number is referred to as the “golden ratio” in mathematics and is used in many areas.
The golden ratio is found in many known mathematical shapes and formations. In addition to the basic ratio of 1.618, ratios between different number groups in the number string can also be used frequently.
Strangely, it is possible to find traces of the golden ratio in every aspect of life and nature. From the crown of a sunflower to a pine cone. It is very possible to encounter this golden ratio in every aspect of life, from human body measurements to architectural works.
It would not be wrong to look for a mathematical truth that is so tightly intertwined with human life and nature in human behavior and therefore in buying and selling decisions in the forex market.
What Is The Fibonacci Retracement Tool And Its Application In Forex?
Because price movements of all investment instruments are a result of human behavior. Prices, which reflect all the feelings and decisions of the investor, of course proceed in a close relationship with the human element.
Therefore, important resistance and support points, ups and downs, and buying and selling decisions on price charts can often be closely related to Fibonacci ratios.
The most important ratios used regarding Fibonacci number strings can be mentioned as 0.618, 0.500, 0.382. However, the ratios 0.236 and 0.764 are also used occasionally.
There are multiple tools you can use under the Fibonacci toolbar on forex trading platforms. We will try to give you detailed information about how to use them under this heading.
Any price that accelerates from a certain starting point and progresses until it completes its momentum may often encounter obstacles at the retracement points indicated by Fibonacci ratios.
These levels can be easily determined with a Fibonacci Retracement tool drawn between the lowest and highest points of the main trend that has completed its movement.
Selecting the relevant toolbar and pointing the mouse cursor at the lower and upper limits of the specified price amplitude is sufficient for automatic drawing of Fibonacci support or resistance ratios regarding retracement levels.
For example, with this method, Fibonacci Retracement is positioned for a movement that starts from March 15 and continues until March 21.
It is clearly seen that the relevant upward movement encountered serious support at the 0.382 and 0.500 lines in the correction movements it made before continuing on its way.
It is very difficult to say that these levels are coincidental. The support provided by investor behavior in the specified areas is associated with Fibonacci nature by most analysts.
Whatever the reason, it would not be wrong to use such a relationship, which is likely to exist, as a form of analysis and position target determination in price charts.
How Do Traders Identify Support And Resistance Levels With Fibonacci?
All types and levels of forex traders can easily identify support and resistance points by utilizing Fibonacci charts. Fibonacci Retracement can be used easily on charts with both rising and falling trends.
Forex traders can find application areas. The correct application would be to draw from bottom to peak on a rising chart, and from peak to bottom on a falling chart.
Of course, it cannot be expected that all price movements of investment instruments will occur uninterruptedly in a certain direction. Even movements with high acceleration may experience setbacks and pauses at certain time intervals.
Fibonacci ratios serve as good ads to analyze the current situation of prices, which sometimes retreat even though they remain true to the direction of progress. Therefore, understanding golden ratios and practicing on the chart can provide many benefits.
Although not as heavily used as Fibonacci Retracement, the Fibonacci Fans tool can provide meaningful reference points regarding the progress of a particular trend.
Fibonacci Fan lines drawn between the bottom and the intermediate peak during a trend with a certain direction can define an upward and downward line that is compatible with the trend slope. Thanks to these lines, visual reference zones can be created for entries and exits of positions.
What Are Fibonacci Extensions And Their Significance In Forex Analysis?
Generally, coefficients of 0.236, 0.382, 0.500, 0.618 are used. Determining correction levels with rates accepted to be found in nature increases reliability. When looking at the long term, the success in detecting these correction levels is better mastered.
Unlike Reversal Levels, Fan Lines are not drawn between the bottom and the highest peak, but are usually drawn between the bottom and a peak formed in between. Thus, it may be easier to get clues about the future direction of a particular trend.
However, it may be possible to obtain meaningful regions regarding retreat points. Because in our example, it can be seen that the Fibonacci Fan added to an uptrend successfully depicts the support and resistance points specific to the current slope.
Fibonacci Fans can easily find applications in charts with both rising and falling trends. The correct application would be to draw from bottom to peak on a rising chart, and from peak to bottom on a falling chart.
The distribution of price movements over time may try to change direction or make significant movements in certain periods.
It is assumed that drastic movements occurring at any moment will create some reflections in the future and these reflections will manifest themselves at increasing time intervals. A time zone indicator called Fibonacci Time Zones is used to mark these periods on the chart.
How Can Fibonacci Be Incorporated Into A Forex Trading Strategy?
As soon as you select the toolbar called Fibonacci Time Zones and mark the first exit point on the chart, you will see parallel vertical lines following your cursor.
These vertical lines, whose distance to each other in the horizontal plane are positioned by preserving the golden ratio, are placed one after another in the time plane.
A Fibonacci Time Zone placed between the bottom and top of a price that has risen or fallen between any two points automatically defines the next time steps on the chart. In this way, it is tried to understand in which time periods during the course of the chart important movements may occur.
Technical analysts think that the entire pricing history contains many interdependent events, with the idea that every ongoing price move is caused by the shadow of many factors and behaviors related to the past.
An upcoming price movement has the potential to affect all subsequent behavior. For this reason, although it is not used very frequently, Fibonacci Time Zones stand out as a tool that relates the past and the future on a time scale.
Are There Fibonacci Ratios And Patterns That Provide Trading Signals?
1 – 23.6% Ratio: It is the smallest Fibonacci retracement ratio. It usually occurs during smaller price corrections.
2 – 38.2% Ratio: It occurs frequently in more significant corrections of price movements. It is considered a strong retracement level by many analysts.
3 – 50% Ratio: Although it is not actually a ratio derived from the Fibonacci sequence, it is widely used in technical analysis. This level marks the point at which an asset’s price gives back half of a significant rise or fall.
4 – 61.8% Ratio (Golden Ratio): The ratio is the Fibonacci retracement level that is given the most importance in technical analysis. It is thought that large fluctuations in an asset’s price movement may encounter support or resistance at this level.
5 – 78.6% Ratio: Although less common, it can be observed as a significant withdrawal level in some cases.
6 – 100% Ratio: It is often considered an important psychological level as it indicates that an asset is giving back its price movement.
Step by step advice for Fibonacci Retracement in Forex trading
1. Identify the Trend ( Uptrend and Downtrend )
2. Select the Fibonacci Retracement Tool
3. Draw the Retracement ( In an uptrend and In a downtrend )
4. Watch Key Fibonacci Levels
5. Wait for Price Action Confirmation
6. Set Entry Points
7. Define Stop-Loss and Take-Profit
8. Combine with Other Strategies
9. Practice on a Demo Account
I wrote about Fibonacci retracement. See you in the next post,
Anil UZUN