What Is Fibonacci Retracement
Fibonacci Retracement is a key tool used in technical analysis by traders. It was created and developed by Leonardo Fibonacci who set up relationships between key numbers which determine the rise and fall of markets. Fibonacci retracement takes two points on a chart and divides the vertical distance by a ratio. Major Fibonacci ratios are 23.6%, 38.2%, 50%, 61.8% and 100%. Horizontal lines form at those important ratio points and offer support and resistance indicators for traders to speculate market turn. No one knows for certain the reason these ratios work, but they do. As a result, they have become a critical analysis tool for any technical market research. The price of an instrument will likely continue in its trend until it hits one of these key retracement levels. Then the trend will likely reverse. In essence, it is a potential “retracement” of an asset’s price movement in either direction. 61.8% and 38.2% are the most well used of the retracement levels. (Keep in mind that 38.2% is frequently rounded to 38% and 61.8 is often rounded to 62%.) After a price movement in either direction, a technical analyst will use Fibonacci ratios to determine potential support and resistance and forecast any corrections or pullbacks. Fibonacci Retracement is one of many tools analysts use. These ratios are often combined with other indicators and tools to develop an overall strategy.
How To Use Fibonacci Retracement In Forex
Fibonacci is used in forex the same way it is used in all technical research regardless of instrument. Whether you are looking at a chart for a currency pair or are examining the latest stock price of IBM, the principles of Fibonacci Retracement remain the same. It is uncertain whether Fibonacci has a direct influence over price movement, or if the reasons it is such an effective indicator lies in the belief of traders that it has an impact. Whether in force or not, if enough traders believe there will be a retracement at a key level, there will be a retracement. It becomes a bit of the which came first, the proverbial chicken or the egg. Either way, the challenge with Fibonacci ratios rests in identifying these potential swings. A forex trader needs to find an emerging trend and determine if it is likely to retrace back to the previous price point. One key forex strategy is to use Fibonacci Retracement as a guide as to where to place protective stops or profit limits.
AlfaTrade And Forex
Fibonacci Retracement is becoming more and more popular with forex traders for the simple reason that it works. The market without a doubt responds to these ratios. Of course, like any trading tool, it is more an art than an exact science. If trading were an exact science there would be no need for it. Becoming familiar with these key Fibonacci ratios can help a trader not only improve his or her own personal strategy, but can offer insight into how the market moves in general. AlfaTrade is a specialist in Forex Trading. They can help you understand key trading tools, like mastering Fibonacci Retracement, so you can take your trading to the next level. The most amazing thing about Fibonacci’s numbers is they transcend the world of finance and can be applied in all of nature, from the deepest reaches of space to the formation of our own DNA. Therefore, the Fibonacci Ratios take an organic approach to the markets by viewing them as an organism more than mere financial institutions. Fibonacci most likely works to the extent it does in trading, however, as the result of the psychology of the traders themselves who seem to be linked to the ratios both consciously and unconsciously. If most traders decide to buy or sell at a certain level, for a certain reason, the price will go up or down accordingly. Having the insight as to when most traders are likely to do such is the foundation of understanding Fibonacci Retracement. AlfaTrade can help you get there.