The Fibonacci retracements use the Fibonacci sequence that was discovered by Mr. Fibonacci, an 11th-century mathematician. It is argued that there are Fibonacci numbers that occur everywhere in nature, and traders use this sequence in forex trading. Fibonacci retracements are identifiers of key support and resistance levels.
When a market curve has made a large upwards or downwards move and seems to flatten at a certain level, this is usually when traders can do the Fibonacci level calculations.
In Fibonacci retracements, traders set a target on a set of percentage points on a trade of a particular commodity. If the price falls beyond the last set percentage point, it is assumed the trade will continue in that particular trend until it stabilizes, be it on an increasing or decreasing trend.
This, therefore, influences the point at which a trader will want to buy or sell, ultimately influencing their bottom line.
The Fibonacci retracement can be used in trading to identify resistance levels, draw support lines, set up target prices, and place stop-loss orders.
The Fibonacci ratios have the potential to be used as a primary mechanism in countertrend trading strategy.
The Fibonacci sequence can be observed in nature occurring naturally. Some of the places the Fibonacci sequence can be observed are in the arrangement of leaves on a stem, branching of trees, fruit spout of a pineapple, etc.
The key percentage points at which most traders use the Fibonacci retracements are the 32.8%, 50%, and 61.8% marks. When these points are introduced in a trade graph, each percentage point coincides with a certain price of a commodity being traded.
The Fibonacci retracement levels are considered very important when a volatile market has reached a serious level of resistance or support.
The 50% mark is not a part of the Fibonacci numbering sequence. It is included because of the experience of market trading and used as a halfway point before a market resumes its trend.
Forex Strategies by Traders Using Fibonacci Levels
Different traders use different strategies to trade commodities and the stock market. So as a responsible investor, you need to find which strategy best works for you.
Different strategies utilize the Fibonacci retracement and they are as follows:
- You have the option of buying in near the 38.2 percent retracement level. You can then go ahead and add a stop-loss order placing it just below the 50 percent level.
- You have the option of buying in near the 50 percent retracement level. You can then go ahead and add a stop-loss order placing it just below the 61.8 percent level.
- When you get to the sell position near the top of the big move, you can put into use the Fibonacci retracement levels as profit-taking targets.
- In case the market closes to any one of the Fibonacci levels and then continues the previous direction, you can use the higher Fibonacci levels of 161.8 percent and 261.8 percent to try and find the future resistance and support levels. This is in case the market moves beyond the low or high that was previously reached before the retracement.
All traders have different strategies that maximize their profits, reduce their loss, and help them keep their emotions in check.
The Fibonacci strategy used in trading uses hard data, and if a trader sticks to his or her strategy then they should suffer very minimal emotional interference.
The Fibonacci strategies discussed above may be used to trade in the trading short term like for minutes or can be used a long term like for years.
Many traders have been successful in trading when using the Fibonacci ratios and retracements. They place long-term trades with long-term price trends.
The Fibonacci retracement has the potential to be better, more accurate, and more powerful if it is utilized and used together with other indicators or technical signals.
However, due to the unstable nature of currencies, trades are executed on a short-term basis.
Forex is not for the easily bored. To be able to trade successfully, you have to love numbers. The terms highlighted above are some of the most commonly used terms in trading forex. By understanding the terms used in the trade, you will be better placed to make informed trading decisions likely to influence your bottom line positively.