FibonacciHow To Use It In Forex


  • Leonardo Fibonacci was an Italian mathematician who lived between the twelfth and thirteenth centuries, famous for discovering a very interesting mathematical series of numbers. Each number being the sum of the two previous ones: 0, 1, 1, 2, 3, 5, 8, 13, 21 etc.If you take each number of the series and divide it by the previous one, you get a number that tends to get closer to a constant value of 1.618symbolized by Phi, aka "The goldenratio".

    It has become famous because it is also present in nature (in the relationship between the spirals of shells or galaxies etc.).In the human body; relationship between the distance from the feet to the belly button and that between the belly button and the head; or the relationship between DNA helix; and in so many other examples.

    In the Forex they have some relevance as often the price movement starts and ends following the logic of these numbers. They are represented on a scale from 0 to 100 with these values:

    - 88.6 
    - 78.6
    - 61.8
    - 50
    - 38.2
    - 21.3

     

    • How to use it in Forex

    The Fibonacci Strategy in Forex is used only in the presence of a trend. As mentioned earlier, the price never follows a straight line, but it always forms waveform cycles in which it first performs a movement in a precise direction (called SWING), then reverses to a certain percentage of SWING (called RETRACEMENT), followed by a resumption in the previous trend direction until the maximum reached SWING (EXTENSION) exceeds a certain percentage.

    Fibonacci’s numbers help the trader predict/estimate when the price will end its retracement and will resume its main trend.

    Here’s an example: let's suppose we notice a growing trend; so after a swing, the price begins a retracement. First is a selection of the Fibonacci tool on the MetaTrader platform and applying it to the price chart by clicking the tool between the two extreme minimum and the maximum of the price swing. The theory is that prices should retrace towards the Fibonacci levelswith a good probability of bouncing off one of the levels. The stronger the swing, the greater the likelihood that the reversal may occur at the highest levels. Conversely if the swing is weak, there is greater probability that the retracement/trend correction will be deeper with trend resuming at the lowest levels.

    The best idea for a trader is to look for reversal signals (such as pin bars, supports/resistance, long-term trend lines, stochastic reversal, etc.) occurring at one of the Fibonacci levels. The more reversal signals found on the price chart, the greater the likelihood that the pair will resume its trend.

    This is just an example of how to use Fibonacci numbers with Forex, but there are other methods and strategies to use them in an equally profitable way.

Interviews

  • the Analyst's answer

    Jean Grossett - Financial analyst

    The use of Fibonacci levels in my opinion can be subjective, given that different traders may plot the indicator differently on the same chart. Some may use the High and lows for drawing their swings, while others may use the closing price. The more popular of the 2 is using the High and Lows.

    Another issue in subjectivity is choosing which retracement level is preferable as price could sometimes in a ranging market, oscillate around different levels.

    The key to successfully using Fibonacci retracement is the ability to spot early forming trends in a sea of different time frames and trade securities to plot   swings. Using this tool in combination with other technical/price action techniques can yield very desirable results in the hands of a very skilled and experienced trader/chartist.

  • the Manager's answer

    Robert Danvil - Investment Manager

    Other than the Fibonacci retracement, there is also the Fibonacci Extension, Fibonacci Arc, and my favorite, the Fibonacci Fan. Seeking professional advice of these tools is highly advised. I will recommend Fibonacci tools for general directional view, and not to be used in isolation.

Members Comments

  1. Profile photo gravatar of Brenda Roob
    Brenda Roob (utillman)
    says:

    Fibonacci is a great tool for trading. Fib levels for monthly highs work very good for day or swing trading.

  2. Profile photo gravatar of Khalil VonRueden
    Khalil VonRueden (clemmie-runolfsdottir)
    says:

    One of my favorite and most useful tool for trading. But like anything else, it needs to be combined with other indicators. Most important levels that I watch are 38,2%, 50%, and 61,8%. When the price comes to one of this levels, I always check the other indicators for confirmation. Good idea for combining the Fibonacci is with some oscillator like RSI, Stochastic or MACD and some Moving Averages whether you will use as a support/resistance or crossover.

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