Fibonacci retracements are used by traders and investors in the Forex market as a method of technical analysis. They are used to try and determine the levels of support and resistance for different currencies.
Fibonacci analysis is named after its creator, Leonardo Pisano, who was a famous Italian mathematician who was nicknamed “Fibonacci”. Fibonacci can be effective and it involves numbers, sequences and ratios. Leonardo Pisano’s work suggests that in nature, regardless of the subject matter, there is always a mathematical “order”. Fibonacci analysis is based on the many mathematical relationships and as they are observed very often, they are considered to be significant and not simply random.
There are many skeptics of Leonardo Pisano’s work. Fibonacci analysis might sound vague and far-fetched to you, but it can actually be applied to Forex trading. Traders and investors in the currency market, only need to think carefully about the following two facts, before they try to evaluate the importance of Fibonacci analysis:
– Leonardo Pisano believed that there were many mathematical ratios that could be found in nature everywhere. He also believed that these ratios were significant
– A large proportion of traders and investors in the FX market know about Fibonacci ratios and consider them when they place orders.
Fibonacci ratios could well be significant and this might well be the reason why so many Forex traders look at them. However, on the other hand, it could be argued that they are only significant solely because there are so many currency traders who look at them. Generally though, traders and investors in the Forex market do not worry about this philosophical argument and they tend to focus mainly on ways in which they can take advantage of Fibonacci analysis, in order to make more profit.
There are certain ratios in Fibonacci analysis, that are considered more significant than others, to Forex traders. These more significant ratios are as follows: 38.2%, 50%, 61.8% and 75%. Combining these more significant ratios from Fibonacci analysis, with other Forex trading methodologies, can help currency traders to potentially find better and more profitable points of entry and exit.
When Forex traders place orders, they want to find the best and most profitable entry point possible, in order to maximize their profits. If a Forex trader discovers a significantly strong upward trend in a particular currency pair’s price, but they do not want to have to buy the currency pair on the trend’s highest point, they might take advantage of Fibonacci analysis. The analysis might suggest that the currency pair’s price might retrace some of the upward trend before returning back to the trend’s overall upward direction. The currency trader would then be in a position where they might consider buying the currency pair at a Fibonacci retracement level – whether it be 38.2%, 50%, 61.8%. However, using this trading method, Fibonacci analysis does suggest that profitability will be very low if the upward trend retraces by 75%. So, when Forex traders buy into trends at the lower retracement levels, they might want to consider placing Stop-Loss orders a little below the retracement price of 75%.
After traders and investors place orders, they then wait to profit and eventually start looking for the best and most profitable exit points possible, in order to maximize their profits. Fibonacci retracements allow Forex traders in the Forex market to choose the best and most profitable exit points available to them, in order to maximize their profits. If a currency trader has reason to believe that an upward trend in a particular currency pair’s price is beginning to end, they may open a short position. The Forex trader might expect the currency pair’s price to fall, but they might not be able to predict the extent to which the currency pair’s price will fall. In this case, the Forex trader could return to Fibonacci analysis. Taking into account Fibonacci ratios, they might now predict that the currency pair’s price will fall to equal retracements levels of 38.2%, 50% or 61.8% of the currency pair’s upward trend. Again, a retracement level of 75% could be predicted, however Fibonacci analysis does suggest that currency traders will more likely make profits with the lower percentages.
In conclusion, Fibonacci analysis can sound quite vague and far-fetched at first, but after some practice and application it can work effectively. Fibonacci ratios are important in technical analysis to many traders and investors in the Forex market. Regardless of whether or not Fibonacci ratios are truly significant, ignoring the philosophical arguments over them, they do bear value and you should recognize the Fibonacci ratios when placing Forex orders.