Fibonacci is in essence a sequence of numbers which were discovered by Leonardo Fibonacci, an Italian mathematician. The numbers commence with zero, and then 1 after that. The third number is usually calculated by adding 0+1, which are the first and second numbers. The forth number 3, is the second plus the third numbers (1+2).
In technical analysis, the numbers are used in such a way that a trader does not need to make any calculations. Additionally, one does not have to memorize them. This is due to the fact that all online trading account permit traders to draw the Fibonacci levels, then they have all they need to use.
Over and above, Fibonacci trading necessitates that a trader should understand how to use the levels to analyze the price chart and get the next price destination. A trader should also know when and where the market reverses or keeps on following a particular direction.
The vital aspect in Fibonacci trading is that the levels are in actually the support and resistance lines. This implies that when a Fibonacci level is broken as a resistance, it will act as a support, and will also be retested. This is also similar to when a Fibonacci level becomes broken as a support. It will act as a resistance then.
Identifying potential retracement levels
Fibonacci retracements are largely considered to be a predictive technical indicator since they try to identify future exchange rates. The theory behind it is that following a spike in either direction, the rate will all the time return, or retrace. In this way, it will part way back to the previous price level prior to resuming in the original direction.
Due to their acceptance as well as extensive usage by technical analysts, it is vital for a trader to understand how to interpret Fibonacci numbers. However, just like any other indicator, it is important for one to get confirmation from many other sources in order to bolster Fibonacci analysis prior to base a large trade. It is therefore advisable for one to be discreet when making use the Fibonacci retracements as a technical indicator.
By placing Fibonacci lines over the price chart and extending the lines past the present spot rate, a trader will be in a position of locating each of the potential retracement points and probably adjust his trading strategy on the basis of the feedback received.
In most cases, retracement levels will indicate possible support and resistance levels as the rate retraces upwards. However, in case the exchange rate is below the retracement level and the trend displays upwards momentum, a trader may wish to consider the next Fibonacci level a potential future resistance level for the currency pair.
On the other hand, in a case where there is a downward trend, the opposite approach must be taken. When trending downwards, each Fibonacci retracement level will identify a potential support level where a trader can start to buy the currency pair. This has the effect of reversing the downtrend.
There is usually more at play than meets the eye when it comes to Fibonacci rations as well as currency pair retracements. This is due to fact that on its own, Fibonacci sequence may not have a direct effect on currency prices.
However, in case traders taking part in a market are of the view that a retracement is likely to happen near a Fibonacci ratio level and thus act accordingly, then there is a likelihood of all pending orders to impact the market price.
Over and above, Fibonacci numbers work in forex trading since they largely reflect the psychology of the traders. Trading forex or stocks involves getting to know the psychology of the traders. This means that at the moment when many traders are selling, the prices will definitely go down. On the other hand, when many traders are buying, the prices will go up.