In order to be a successful forex trader, you’ll need a plan. It might be as easy as creating a trading budget and timetable for some, while it could include looking into more intricate mathematical procedures.
The Fibonacci sequence is a popular trading approach. When you look about you, you will see the same sequence of numbers wherever you look, from nature to architecture. This is called the Mandelbrot Set. As a result, how can we apply these principles to forex trading? We’ll look at how traders use the sequence to determine their trading approach in the following tutorial.
The Fibonacci Numbers
Using the Fibonacci sequence in trading requires a deeper understanding of the series’ unique mathematical qualities. Every consecutive number is just the sum of two preceding numbers after the first and the last, which is known as the Fibonacci sequence. This provides us with the following:
We can go on and on and on and on and on and on and on… ad infinitum.
The mathematical correlations between these numbers form the basis of Fibonacci trading methods. The number of ways to interpret a string of numbers is almost limitless, but we’ll focus on a handful here.
Divide a number by the one after it, and you get 0.618; divide another number by the one after it, and you get 0.382. As we’ll see, both of these numbers are relevant for constructing a Fibonacci trading sequence.
Make Advantage of the Fibonacci Sequence of Numbers
So, what do these data have to do with forex trading, you may wonder. The concept is that, during an uptrend, you should purchase on a retracement after identifying a Fibonacci support level, and that, during a downturn, you should sell at a Fibonacci resistance level, as explained above. Building these levels on the figures 0.618 (61%) and 0.382 (38%), respectively, may be accomplished in the following ways:
Retracements
A retracement is a method of spotting a prospective shift in the price direction of a financial asset or a stock. A fundamental feature of the Fibonacci trading method is that it can be used to identify critical levels of support and resistance in prior price movements. The reasoning behind this is that following a spike in price movement, the market will return to a certain point before continuing in its original path.
Fibonacci figures of 38.2% and 61.8%, as well as the 50% figure, are commonly used by traders to draw retracement levels across the chart and identify price levels of support and resistance where a reversal in direction is most likely, which can then be used to determine appropriate entry levels. It should be noted that the 50% threshold is not generated from the sequence, but is instead incorporated in the approach in most cases.
Extensions
The identification of extension levels is the next step in the development of a Fibonacci trading system. In order to detect prospective exit sites, extension points are employed. For obvious reasons, we use Fibonacci numbers that stretch beyond 100% in this context. Using basic sums based on the sequence, we can calculate the critical extension points, which are 61.8%, 261.8%, and 423.6%. Once again, we will make use of these data to sketch out our possible evacuation routes. To put it another way, if we use Fibonacci retracement levels to determine the beginning of a trend, we can use the extension levels to determine the end of that trend.
Trading Techniques Based on the Fibonacci Sequence in Action
Traders use methods in a variety of ways, and the Fibonacci trading approach has a wide range of applications. After you’ve calculated your forex Fibonacci levels using the technique above, you might purchase at the 38.2% level and place a stop-loss order just below the 50% level, as seen in the chart below. Instead, you might select to purchase at the 50% mark and position your stop-loss order below the 61% line, as seen in the chart below.
Using the Fibonacci retracement levels as profit-taking objectives when establishing a sell position near the peak of a market movement is a good strategy. The higher Fibonacci levels of 161.8 percent and 261.8 percent may be used to identify support and resistance levels if the market retraced close to one of the Fibonacci levels before resuming its previous path. If the market exceeds the high/low that was reached before the retracement, you can use the higher Fibonacci levels of 161.8% and 261.8% to identify possible future support and resistance levels.
Take a look at the following section to see how you can realistically design retracement levels. A practical implementation will allow you to make the most of this method to its full potential.
Draw the Fibonacci Retracement Levels
At this point, you may be asking how precisely you go about drawing the Fibonacci retracement levels into your trading platform’s trading platform. The good news is that any professional operator will have a plethora of tools at their disposal to assist you in achieving your goals. In fact, several will totally automate the procedure, requiring you to do nothing more than choose the appropriate selections from a menu. With next markets, for example, you’ll discover that the FibR tool will enable you to quickly and easily build your retracement lines without having to perform any complicated calculations yourself.
Is Fibonacci Trading a Good Fit?
Every trader will have their own trading style, and they will apply techniques that are appropriate for their style. Its benefit over other trading strategies is that it provides a defined formula for spotting trends and, as a result, viable entry and exit points in a trading session. This is especially useful for keeping emotions under control and ensuring that you follow through with the strategy.
Another advantage of forex Fibonacci trading is that it can be used in combination with a variety of trading tactics, including as day trading, swing trading, scalping, and position trading, to produce profitable results faster. You are not need to follow the sequence, though. However, it is simply one method among many that traders regularly apply and one that has been demonstrated to produce results – it is not a magic wand, and there are other different ways on how to identify resistance and support areas.