The Fibonacci sequence appears widely in many fields from science to art and financial investment. In the Forex market, the Fibonacci indicator is used as a technical analysis tool to identify support and resistance levels. So what is Fibonacci and how to apply it in technical analysis? Let’s explore details with Forex Trading in the article below.
What is the concept of Fibonacci?
Fibonacci is an important indicator in technical analysis. Derived from the mathematical theory of Leonardo Fibonacci, a mathematician who lived in the 12th century. According to this theory, the Fibonacci series starts with 0 and 1. Then each subsequent number is the sum of the two numbers before it.
This series of numbers looks like this: 0, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610… From this series, people divide the numbers among themselves and generate Important ratios that appear: 161.8% (golden ratio), 23.6%, 38.2%, 61.8%.
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Types of Fibonacci in Forex
The Fibonacci number sequence has become a great assistant for traders. In identifying potential support and resistance levels and predicting market trends. Below are the common Fibonacci types used in Forex trading.
Fibonacci retracement indicator (Fibonacci retracement)
What is Fibonacci Retracement ? Fibonacci retracement is a tool for predicting reversal points in price charts. This is the process of temporary price adjustment in the context of the main trend.
This tool uses Fibonacci ratios such as 38.2%, 50%, and 61.8%. To evaluate the level of price adjustment based on the most recent rising wave. And rarely do corrections surpass the 61.8% Fibonacci level. The trader can decide on the buy point.
Drawing Fibonacci Retracement with just simple steps. You just need to choose the highest point of the increase as the peak and the last point of the increase as the bottom. Fibo ratios will be displayed on the chart, helping you monitor the extent of the price correction. However, the fact that the price touches the reversal zones does not mean that the price will reverse immediately, but is just a potential zone to observe.
What are Fibonacci Fans? (Fibonacci fan)
Fibonacci Fans, also known as Fibonacci Fans. Is a technical analysis tool applied in financial markets.
Specifically, Fibonacci Fans use important levels such as 23.6%, 38.2%, 50%, 61.8%, and 100%. To create diagonal lines on the price chart. These lines help traders identify potential price levels.
The operating steps are as follows:
- Choose tops and bottoms: The first step is to identify a peak and a trough on the price chart of the specific asset.
- Applying Fibonacci Fans: Fibonacci Fans are applied from bottom to top or from top to bottom. It depends on the trend you want to identify.
- Identify support and resistance levels: Diagonals create potential support and resistance levels on the chart. Traders use these levels to make buy or sell decisions. Based on the position of the price relative to these diagonal lines. In Fibonacci Fans, diagonal lines can be considered “defining lines” to determine buying and selling points.
Fibonacci arc indicator (Arc)
What is the Fibonacci Arc indicator? Fibonacci Arc, also known as Fibonacci Arc. Is a tool applied to identify potential support and resistance levels on price charts.
Specifically, Fibonacci Arc uses important levels of the Fibonacci series such as 38.2%, 50%, and 61.8%. To create a series of arcs that help traders identify potential price levels.
How to use the Fibonacci index to determine profit-taking points
What are the advantages of the Fibonacci sequence? The Fibonacci sequence can predict reversal points in price trends. Just by knowing the top and bottom of a trend, we can build a very specific price movement scenario. How to use just click and drag from the top to the bottom assuming the recovery point.
For example, with PPC stock, after determining the peak at 21k and predicting the bottom at 15k. We set up resistance levels at the Fibo levels of 38.2%, 50%, 61.8%, 100%. These levels show where the price could reverse.
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What is Fibonacci the application of the indicator in forex?
The foreign exchange market is constantly fluctuating, creating opportunities and challenges for investors. To make informed investment decisions, the use of technical analysis tools is indispensable. Let’s see what the applications of the What is Fibonacci?
Application of Fibonacci in determining support and resistance levels
The Fibonacci indicator is used to identify support and resistance levels in price charts. Popular Fibonacci levels include 0.236, 0.382, 0.500, 0.618, and 0.786. Usually applied to mark these levels on the chart.
- Fibonacci Retracement: Draw horizontal lines at Fibonacci levels (23.6%, 38.2%, 50%, 61.8%, and 100%) between two extreme points (top and bottom). To identify potential support or resistance areas.
- Fibonacci Expansion: Draw horizontal lines at Fibonacci levels (1.618, 2.618, 3.618, and 4.236) from a reversal point. Helps predict potential price targets in up/down trends.
How to use Fibonacci to predict potential price levels
How to use Fibonacci to predict potential price levels? The Fibonacci indicator provides a method to predict potential price levels. Based on the law of proportionality and the relationship between Fibonacci levels and the current price. This helps traders identify potential levels to which the price may react.
- Fibonacci Extension: Based on Fibonacci levels (1.618, 2.618, 3.618, and 4.236) to predict potential price targets in up/down trends.
- For example: After the stock price bottoms and begins an uptrend. We can draw Fibonacci Extension lines from the bottom point. To identify potential target prices at 1.618, 2.618, 3.618, and 4.236.
What is Fibonacci Buy and Sell Points?
Fibonacci is also used to determine buy and sell points in trading. When the price touches important Fibonacci levels such as 0.618 or 0.786, traders may consider opening or closing a position. Depending on the trend and other technical signals.
- Fibonacci Fan: Draws diagonal lines from a reversal point. Cross each other at the Fibonacci levels (38.2%, 50%, 61.8%), forming price “fans”. The intersections of the Fibonacci Fan diagonals are considered potential buy/sell points.
For example: In an uptrend, if the price retraces and meets support at the 50% Fibonacci Fan level. This could be a potential buy point to join the uptrend.
Fibonacci in Forex determines market cycles
In the foreign exchange (Forex) market, Fibonacci is used to identify market cycles. Fibonacci levels can be applied to measure the period from one peak to another or from one trough to another. Helps traders recognize repeating cycles in price charts.
- Fibonacci Extension is used to identify potential timings for market cycles. Based on Fibonacci levels (1.618, 2.618, 3.618, and 4.236).
For example: After the market bottoms and starts an uptrend. We can draw Fibonacci Extension lines from the bottom point. To identify potential timing points for increases/decreases in the trend.
Conclude:
With the above information about What is Fibonacci, investors have complete autonomy in planning their purchases and determining when to take profits. This brings great advantages when participating in stock trading on the market. Don’t forget to follow Forex Trading to expand your knowledge and soon be able to participate in real trading on the market.
Frequently asked questions
How does Fibonacci affect current Forex technical analysis?
Fibonacci is an important technical analysis indicator. Widely used in price chart analysis by investors and forex traders today.
What are the popular Fibonacci levels?
Popular Fibonacci levels include 0.236, 0.382, 0.500, 0.618, 1.000, 1.382 and 1.618.
How to apply Fibonacci to Forex trading effectively?
To apply Fibonacci to Forex trading effectively. Investors need to combine it with other technical analysis methods and determine a reasonable risk level.
