As a trader, you need to be well-prepared to use Fibonacci retracements a lot. They are tools that represent a huge piece of a subject that refers to financial market analysis. Generally, Fibonacci retracement levels are used by technical traders. They introduce a set of numbers every investor must learn by heart, as the importance of these numbers in your everyday trading is enormous.
Beginners may come across various studies that refer to using Fibonacci retracements. However, before we dive deep into this topic, we need to explore some major basics.
Fibonacci retracements were adapted by modern traders to use in the financial market. They were originally applied by Leonardo Fibonacci as the measurement to study the universe as well as define the curvature of naturally occurring spirals (patterns of seeds, snail shells, etc.). The initial idea was to use the Fibonacci sequence as the instrument for depicting the proportions of every small thing we can find in the universe.
The sequence involves a series of numbers. They are as follows: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144 and so on. It can keep on going to infinity.
Today, many traders use the sequence we have mentioned earlier as a tool to maintain technical analysis. It makes it possible to identify the key levels that indicate the best market entry and exit positions.
Before using Fibonacci retracement, you need to learn these numbers: 0.236, 0.382, 0.618, 0.764 (most of all, you will see them on trading charts like this: 23.6 38.2 50 61.8). These are Fibonacci ratios every Forex trader must know. Additionally, you will need to learn Fibonacci extension levels: 0, 0.382, 0.618, 1.000, 1.382, 1.618.
Beginners will be happy to know that these numbers do not require manual calculation. All you need is reliable chart plotting software. For example, MT4 has a built-in charting functionality that will do most of the work for you. In other words, you will have Fibonacci levels that are ready to use. Besides, some software comes with integrated Fibonacci calculators.
Despite all technical innovations and automated calculation tools traders still need to be familiar with the Fibonacci retracement background and history to have a clear understanding of how it works.
As stated earlier, the Fibonacci sequence can be applied to almost anything in our world. One can use the number of flower petals to go deep into the rabbit hole. The same can be applied in Forex trading. They can help you predict price movements.
Forex traders use it to pinpoint currency market support and resistance levels. These areas make it possible to identify specific areas with a high possibility of the asset price making a reversal. What’s more, after combining Fibonacci retracement with support and resistance levels, you get an ultimate instrument to set the target price on the chart with simpler options for finding better trading opportunities.
The main reason for using Fibonacci retracement is the ability to make your trading strategy simpler to apply. To bring this idea to life, you will need to learn several important things.
First of all, you have to practice drawing a support and resistance horizontal line. Second, you need to learn how to apply Fibonacci retracement levels on a chart.
The good news is that most of these actions can be completed automatically thanks to advanced trading software and integrated charting functionality.
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.