What is Fibonacci Retracement?Did you see the movie, “The DaVinci Code”? You will find a scene in the movie where the characters talk about the Fibonacci number as part of a clue or code of some sort. First practice on your forex demo account. Learn about forex managed accounts.
So what are Fibonacci numbers? The Fibonacci number series were made famous by an Italian Leonardo de Pisa. The Fibonacci series starts with 0 and 1 and goes out to infinity with the next number in the series being derived by adding the prior two. For example, 0+1=1, 1+1=2, 1+2=3, 2+3=5, 3+5=8, 5+8=13, 8+13=21, 13+21=34, 21+34=55, 34+55=89, 55+89=144, 89+144=233, 144+233=377.
What is so fascinating about this series is that there is a constant found within the series as it progresses to infinity. The Fibonacci series is like this; 0,1,1,2,3,5,8,13,21,34,55,89,144,233,377,610, 987…..to infinity. This constant is known as the Golden Ratio, Golden Mean or Divine Proportion.
You will find the Golden Mean by dividing the higher number with the lower number by taking any two consecutive numbers in the series after the first few. For example, 89/55=1.618, 144/89=1.618, 233/144=1.618, 377/233=1.618, 610/377=1.618, 987/610=1.618 and so on. The inverse of 1.618 is 0.618.
The Golden Ratio can be found in many places in nature like flowers, shells, fossils etc. What is most important to forex traders is that applying these ratios can help identify key support and resistance zone in the market and therefore determine key trading opportunities or setups.
Thus the application of Fibonacci ratios can give you the edge as a forex trader if you use the Fibonacci trading technique properly. We have already discussed the Golden Ratios 1.618 and its inverse 0.618. The main ratios used in everyday analysis are 0.382, 0.50, 0.618, 0.786, 1.000, 1.272 and 1.618.
Since you are trying to look into a type of technical analysis, it is assumed that you have a computer, a market data source such as quote.com and a technical analysis program to manipulate that data. You should be proficient with the technical analysis program.
The Fibonacci price analysis calculations can be done by hand as well but they are time consuming and tedious. There are three types of Fibonacci price relationship namely, retracements, extensions and price projections (sometimes also called price objectives). We will look into each type of these relationships individually.
Each of these Fibonacci price relationships will be setting up potential support or potential resistance in the chart that you are analyzing. The definition of a support is the price area below the current market where you will look for a possible termination of the decline and where you would consider to becoming a buyer of whatever currency pair you are trading.
Similarly resistance is price area above the current market where you would look for the possible termination of a rally and consider being a buyer.