In forex trading you will constantly find reference to support and resistance levels. These are nothing but currency retracement levels in accordance with Fibonacci ratios based on the pioneering work of the great Italian mathematician Leonardo Fibonacci.
Don’t get perplexed with the statement “support and resistance levels are currency retracement levels related to Fibonacci ratios.” Currency and retracement levels could be calculated by the method of determining pivot points. It is only that, there is a correlation between retracement levels and Fibonacci ratios.
But who is Fibonacci, what are these numbers and ratios we are talking of, and just what has all this got to do with forex trading? Firstly who is Fibonacci? Leonardo Fibonacci was a great Italian mathematician who lived almost 800 years ago. He was also known as Leonardo of Pisa.
Before we dwell on the topic of what Fibonacci has to do with forex trading, you ought to get an idea of the mathematics that is associated with Fibonacci. So what is it that Fibonacci has contributed in the domain of mathematics? Fibonacci is famous for developing a numerical sequence that is also known as Fibonacci numbers, in addition to being credited with introducing the decimal system in Europe. The very first Fibonacci number is zero, the second is 1, the third is also 1 and the sequence goes on as follows: 0,1,1,3,5,8,13,21,34,55,89,144,233 and so on. What you would do well to notice is that every number in this sequence is the sum total of the previous two numbers. For example, 3+5=8; 8 +13=21; 55+89=144 and so on. Now you would be amazed to know that Fibonacci sequences and their ratios could be found universally in nature. For example the Fibonacci sequence even relates to the pattern for reproduction of rabbits and also in the design parameters of the great pyramids of Geze. It could also be found amongst nature’s most profound creations like in the arrangement of leaves and flowers. In other words, Fibonacci numbers amazingly have a great deal of harmony with nature, and you cannot think of it as a mere mathematical incongruity. But the fact remains that we do not get to see the numbers like 0,1,1,3,5,8 in forex trading. Nevertheless it is important to bear in mind that the Fibonacci sequence in forex trading is plainly built off the forex price numbers that relate to the basic fibonacci sequence. For example, the fibonacci numbers in forex trading that you would always have to keep in mind are .236; .5; .382; and .618 and so on. Ideally you should commit these numbers to memory. These are the big four numbers in forex trading and they all relate to the fibonacci sequence.
Having said that, what has Fibonacci got to do with forex trading? Well in fact, fibonacci and forex trading have a kind of symbiotic relationship. In forex trading, it is used as an important method of analysis especially for charting forex trends and spotting patterns.
Assume for a moment that a currency pair was trading upwards. Then definitely this trend would continue till a peak is reached after which there would probably be a temporary decline, and then again the upward trend is seen to resume. Now the point at which the currency pair starts the reversal, is where Fibonacci numbers come into play.
So what I am trying to tell you here is, that in the hypothetical case of the currency pair that has been trending upwards, it would normally be expected that the trend reverses temporarily to one of the key fibocacci numbers before resuming its upward journey. Therefore if you can forecast this point accurately you could choose to buy into the trade before the upward trend resumes. If you do that, you stand to take advantage of the reversal and then profit in the upswing.
But things are really not that simple as buying into a trade when a fibonacci number is reached. There are other factors to be reckoned with in reaching a buying decision in this case. Why is that so? That is because you never know which retracement level the price would drop to. It could be hypothetically 0.382, 0.5, or 0.618. Supposing you chose 0.5 to buy, but the price drops further down to another fibonacci number or thereabouts you clearly stand to loose. So it could be really troublesome to rely on just the fibonacci numbers. The truth is, forex markets are so dynamic and so complex that fibonacci in isolation doesn’t always seem to work. And that is due to interplay of several forces at work in forex trading. So do lots of data mining, plenty of research and develop your own forex trading strategy that incorporates as many technical elements and variables as possible. Remember that fibonacci numbers at best can be used only as a secondary parameter in forex trading.
In practical terms, how would you implement the fibonacci mystique into your trading system? For that, all you need to do is simply use the charting mechanism on your online trading platform that charts the fibonacci numbers in relation to the retracement levels, and keep in mind a line from the low to the high point. So what you are getting to do here is that, you could be effectively following the pattern of oscillation in the forex market.