Using The Fibonacci Retracement Level To Profit From Forex Trading

Posted on August 31, 2010
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Fibonacci Retracements are a widely used Forex method that are used by Forex traders to define levels of support and resistance. Fibonacci levels tend to be used mostly for calculating pullback levels in the market following a preceding strong move. These levels are either used to trade any market pullback or instead as a level to position for the resumption of the original trend.

The term Fibonacci comes from an Italian mathematician named Leonardo Fibonacci who lived in the late twelfth century. Leonardo re-examined many historical number sequences in an effort to find a pattern . He found that these number sequences formed a pattern. The number sequence that he identified was created by adding together the two preceding numbers of a sequence in order to create the next. What he also discovered was that in dividing any number in the sequence by the next logical number, you ended up with a ratio of 61.8%. This ratio is called the Golden Number and is part of the Fibonacci sequence used in Forex trading.

Fibonacci Technical Analysis may seem complicated to a novice trader but is actually quite simple to graspFibonacci retracement levels are primarily used by Forex traders in two main ways.

Identifying market retracements with Fibonacci

The most common use of retracement levels is to identify areas of pullback following a strong directional move. After identifying the high and low of the move the retracement levels can be plotted and traded.

Fibonacci Retracements can be applied across any chart time frames and combined with other forms of technical analysis. Fibonacci retracements always occur at specific levels of the previous move. The most standard levels are 23.2%, 38.2%, 50% and 61.8%. Each of these set levels will provide either support or resistance to market moves. The 61.8% level is identified as having unique significance. If this level is breached on a retrace then it is assumed that the entire preceding move will be retraced.

These defined support and resistance levels are also often used by Forex traders as both areas for stop losses and profit targets to be placed.

Fibonacci to identify re-entry into the trend
Identified retracement levels are also used as levels to position ahead for an entry into the original trend. In this case, the retracement levels are used to identify levels that the market may sell off to. This could be because of a healthy correction or consolidation in the market. In this way the trader can position his orders to rejoin the original direction of the trend.

You can easily calculate a Fibonacci Retracement level by the use of a Fibonacci calculator.Remember that as with all techincal analysis approaches, always seek additional confirmation from other technical methods before employing any one trading indicator.

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