What Is Fibonacci Retracements Strategy and How to use it on forex trading? ( Most important for newbie)

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Fibonacci Retracements Strategy Explain for beginners, By Forex Forum.​


what is Fibonacci retracements?

Fibonacci retracements ar terribly productive for temporal order entries within the direction of the trend. Fibonacci is a series of numbers where each number in the sequence is the sum of the previous two. They are used in technical analysis to predict future movements by identifying areas that will bring balance to an asset's price.

When applied to trading charts, Fibonacci levels indicate how much of an asset's value has been traded during a specific timeframe and can be used as major turning points in trend direction. The timeframes range from minutes, hours, days and weeks with traders using different combinations for various purposes such as catching trends or finding support and resistance levels.

What Is Fibonacci Retracement?​


A Fibonacci retracement is a technical analysis tool used by traders to understand when to place and close trades or when to place stops and limits. Fibonacci retracements depend on the mathematical principles of the Golden ratio14, and they are used to find areas of resistance and support in the primary movements of assets.

To calculate Fibonacci retracement levels, traders draw six lines across the asset's price chart: one line would be at the highest point; one would be at the lowest point, one at the midpoint and three at 61.8%, 38.2% and 23.6%. According to the golden ratio rule, these points should be the ones at which significant levels of support and resistance should be detected.

Fibonacci Sequence
In the 13th century, Leonardo Fibonacci discovered a sequence of Fibonacci numbers: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, etc. If you look carefully, you will notice that every following number is the sum of the two previous ones. What is more interesting is that their ratios stand for the proportions in the universe. For example, a tree branch has a Fibonacci spiral.

What are Fibonacci Retracement levels?
Fibonacci retracement levels are support and resistance levels that are based on the Fibonacci numbers. Those are 23.6%, 38.2%, 61.8% and 78.6%. When drawing Fibonacci levels, your trading software is likely to include the 50% level, even though it is not officially a Fibonacci retracement level.

How Does Fibonacci Work In Trading?​

Before we look into the mechanics of Fibonacci trading and how it translates into a Forex Fibonacci trading strategy, it is important to understand the Fibonacci sequence and the unique mathematical properties it provides first.

The Fibonacci sequence is a sequence of numbers where, after 0 and 1, every number is the sum of the two previous numbers. This continues to infinity.

0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987, 1597, 2584, 4181, 6765….

There are some interesting relationships between these numbers that form the basis of Fibonacci numbers trading. While we cannot cover all of these relationships in this article, below are the most important ones you will need to know about when we look at a Fibonacci Forex trading strategy later on:

1. If you divide a number by the previous number it will approximate to 1.618. This is used as a key level in Fibonacci extensions as you'll learn later on in the article.

2. If you divide a number by the next highest number it will approximate to 0.618. This number forms the basis for the 61.8% Fibonacci retracement level.

3. If you divide a number by another two places higher it will approximate to 0.382. This number forms the basis for the 38.2% Fibonacci retracement level.

Fibonacci's golden ratio example
In financial markets, the Fibonacci golden ratio has the same mathematical base as the natural phenomena mentioned above. When traders use the golden ratio in their technical analysis, the ratio is usually translated into three percentages: 38.2% (often rounded to 38%), 50% and 61.8% (usually rounded to 62%). Having said that, traders can use more multiples when necessary, such as: 23.6%, 161.8%, 423%, 684.4% and so on.

The 38.2% ratio is found by dividing one number in the series by the number two places to the right. For example, 21 divided by 55 equals 0.382. The 23.6% ratio divides one number in the series by the number three places to the right. For example, 8 divided by 34 equals 0.235. For learn more about Fibonacci's golden ratio you should join a forex forum. Because inside a forex forum, forex experts share their real experience, knowledge and trading strategies with others. Which will be very helpful for beginners.

How to draw Fibonacci Retracement levels
Drawing Fibonacci retracement levels is a simple three-step process:

In an uptrend:
Step 1 – Identify the direction of the market: uptrend
Step 2 – Attach the Fibonacci retracement tool on the bottom and drag it to the right, all the way to the top
Step 3 – Monitor the three potential support levels: 0.236, 0.382 and 0.618

In a downtrend:
Step 1 – Identify the direction of the market: downtrend
Step 2 – Attach the Fibonacci retracement tool on the top and drag it to the right, all the way to the bottom
Step 3 – Monitor the three potential resistance levels: 0.236, 0.382 and 0.618

How to Use Fibonacci Retracements in Trading copy.jpg


How to Use Fibonacci Retracements in Trading​

Here are the steps involved in making use of Fibonacci retracements for forex and CFD trading:

1. Find the Fibonacci retracement on your trading platform.

2. Determine the current trend and find the highest and the lowest points. There must be no other tops and bottoms that exceed those you have chosen.

3. Draw a line, so-called baseline, connecting the highest and the lowest points.

4. If you trade in the bullish trend, draw the line from bottom to top. If you consider a bearish trend, the line should go from maximum to minimum. To make it easier, remember that you should draw the line from the left corner to the right corner.

5. As soon as you draw the line, six horizontal Fibonacci levels will appear. These are 0.0%, 23.6%, 38.2%, 50%, 61.8%, 100%. You can always add additional levels if your trading strategy requires it.

6. As these levels are used as support and resistance points, the price is supposed to consolidate near them. In such a situation, the price should either break the Fibo level, it will mean the trend is strong or move to the next level, signaling a continuation of the correction.

Fibonacci support and resistance

Fibonacci levels are mainly used to identify support and resistance levels. When a security is trending up or down, it usually pulls back slightly before continuing the trend. Often, it will retrace to a key Fibonacci retracement level such as 38.2% or 61.8%. These levels provide signals for traders to enter new positions in the direction of the original trend. In an uptrend, you might go long (buy) on a retracement down to a key support level. In a downtrend, you could look to go short (sell) when a security retraces up to its key resistance level. The tool works best when a security is trending up or down.

Pros and cons of Fibonacci Retracements

Pros of Fibonacci Retracements

As a means of identifying levels of support and resistance, Fibonacci retracements can be used to confirm suspicions of a market movement.

Cons of Fibonacci Retracements
However, Fibonacci retracements require a high level of understanding to be used effectively. Simply drawing lines on a price chart at the Fibonacci percentages will likely not yield positive results unless traders know what they are looking for. As such, beginner traders should take care when using Fibonacci retracements to be sure that a dip in an asset's price is a temporary pullback, rather than a more permanent reversal.

Why do traders use Fibonacci Retracements?

Markets rarely move in a straight line, and often experience temporary dips – known as pullbacks or retracements. Fibonacci retracements are used by traders to identify the degree to which a market will move against its current trend.

The retracements are based on the mathematical principle of the golden ratio. The sequence for the golden ratio is 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, and so on, where each number is roughly 1.618 times greater than the preceding number.

For learn more about Fibonacci retracements join these forex forum.

You can learn more about forex trading at forum.forex

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Thank You
 
Forex traders use Fibonacci retracements to pinpoint where to place orders for market entry, taking profits and stop-loss orders. Fibonacci levels are commonly used in forex trading to identify and trade off support and resistance levels.
Have a good day!
 
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