Fibonacci is highly appreciated by investors and financial traders. They often use this popular tool in technical analysis and predicting market movements. Therefore, forex traders often use Fibonacci commonly in their transactions. So what is the Fibonacci sequence and how to apply this tool in the foreign exchange market? Let’s learn about Forex Trading through the article!
What is the Fibonacci sequence?
The term Fibonacci is mentioned a lot in the forex trading community. However, understanding the nature of the Fibonacci sequence is something few people can do. The name Fibonacci comes from its inventor, Italian mathematician Leonardo Fibonacci.
What is the Fibonacci concept?
Fibonacci is an infinite sequence of natural numbers, discovered in the 13th century. In 1202, the Fibonacci sequence was officially used to find unknown numbers in many mathematical problems. After that, several experiments by other mathematicians also showed similar results.
The Fibonacci sequence starts with 0 and 1 or 2 1’s. The next elements in the sequence follow the rule that the following element is equal to the sum of the previous 2 adjacent elements. The Fibonacci sequence has the following recurrence formula:
Applications of What is the Fibonacci sequence?
Fibonacci is considered the golden ratio in technical analysis as well as in predicting price fluctuations in the financial market. Some important Fibonacci levels to identify resistance and support points on the price chart. Such as 23.6%; 38.2%; 50%; 61.8% and 100%. Specifically:
- Identify resistance/support levels: Fibonacci levels represent the price level at which the market may reverse. Here, traders can consider entering buy and sell orders.
- Price prediction: Fibonacci numbers and ratios help traders predict the price level to which a forex asset may adjust.
- Identify volatility cycles: Fibonacci levels help traders identify market cycles as well as price trend reversal points.
See more: Profession forex trade thanks to Fibonacci applying
What are the types of Fibonacci patterns?
Fibonacci is a big topic of interest to many researchers. Among them, there are two main types of models that many financial traders are interested in. These are the Fibonacci extension and Fibonacci retracement (retracement).
Fibonacci Retracement
Fibonacci Retracements are hidden levels where support or resistance lines may reverse. This Fibonacci pattern is commonly used in forex analysis techniques.
Fibonacci retracement (retracement) levels work in theory. After a major change in price in some direction, all prices will return to the previous level before returning to the original price.
Fibonacci Extension
Fibonacci Extension (extension) is an indicator that helps measure the upward or downward price trend beyond the base price. Traders often use Fibonacci extension levels to establish potential price or profit targets that can be achieved. In particular, many traders monitor the Fibonacci extension level to enter buy and sell orders. That’s why this model is so popular and works so often.
How to use Fibonacci retracement effectively in Forex
You need to understand that Fibonacci works best when the market moves in a certain direction. Typically, traders want to buy at support during an uptrend. Also, sell at a resistance level when the market is in a downtrend.
Draw Fibonacci retracement
To determine the Fibonacci retracement level, traders need to learn how to draw Fibonacci retracement and find the highest and lowest price in the most recent time. From there, in a downtrend, you drag the mouse to connect the two nearest peak and bottom points. On the contrary, with an uptrend, just drag the mouse from the bottom to the nearest peak.
How to use Fibonacci Retracement with an uptrend
Look at the example AUD/USD chart below for easy visualization:
You can see the line connecting the bottom (Swing low) on April 20 to the top (Swing High) on June 3. Accordingly, the corresponding Fibonacci retracement levels for each ratio will be 0.7955 (23.6%); 0.7764 (38.2%); 0.7609 (50.0%); 0.7454 (61.8%); 0.7263 (76.4%).
If you expect the forex gold price to correct down from the most recent peak, the support level will be at one of the above Fibonacci retracement levels. There, traders will place a buy order with the hope that the price will increase again.
How to use Fibonacci Retracement with downtrend
Observe the EUR/USD chart in the 4h frame below to see how to use Fibonacci retracement with a downtrend:
You will see the most recent peak of the chart at Swing High (1.4195) – January 25. The nearest bottom at the Swing Low on February 1 is 1.3854. Accordingly, based on the Fibonacci retracement ratio to determine the corresponding retracement level: 1.3933 (23.6%); 1.3983 (38.2%); 1.4023 (50.0%); 1,4064 (61.8%); 1.4114 (76.4%).
In this downtrend, traders expect the price to recover and then hit the resistance level at the above Fibonacci levels. From there, sell orders will be established.
How to use Fibonacci extensions in Forex trading
Traders often use Fibonacci extensions to determine profit-taking points, resistance, or support areas. If the price moves to a certain Fibonacci extension level, it can still move to the next level.
Fibonacci extensions will help traders measure how far the price will move in the future. Combined with a few other technical indicators, the trader will decide whether to continue holding the position at that Fibonacci level or not.
How to use Fibonacci extensions in an uptrend
Drag the mouse pointer from the lowest position to the highest position, then release. Finally, drag to the next position which is the reversal point. Fibonacci extension ratios in an uptrend include 0.0; 0. 382; 0.236; 0.5; 0.764; 0.618; 1.0; 1,618; 1,236… in order from bottom to top.
How to use Fibonacci extensions in a downtrend
In contrast to the uptrend, you drag the mouse pointer from the highest position to the lowest position and then release it. Then, drag the mouse to the reversal point.
See more: Optimize trading with IC Markets Exchange
Points to note when using What is the Fibonacci sequence?
You need to clearly understand that Fibonacci is not a tool to help you analyze with absolute accuracy. Therefore, when doing technical analysis, you need to combine this indicator with other technical tools and indicators. Specifically, below are the main points to note when using Fibonacci.
Combine Fibonacci with other tools
When using the same types of technical analysis support tools such as trend lines, and moving averages (MA),… the Fibonacci ratio is maximally effective. From there, you will have the most comprehensive view of price fluctuation trends.
Take advantage of each Elliott and Fibonacci wave relationship
Combining Elliott waves and Fibonacci helps you find support and resistance levels at waves in the market more accurately. Traders can recognize the parameters easily. Additionally, Fibonacci retracement can help determine the extent of the corrective wave B relative to wave B (within 61.8%).
Consider flexibility
You need to make sure to use Fibonacci during clear and large price trends. Even if Fibonacci levels are not completely accurate, they still provide traders with useful information.
Conclude:
Above, Forex Trading has provided readers with the knowledge that a new trader needs to grasp about What is the Fibonacci sequence. Use the Fibonacci indicator as a powerful tool to help you make the most optimal investment decisions. However, you need to remember that in forex, nothing is 100% accurate, combine it with experience and improve your trading knowledge to be more successful.
FAQs:
The biggest difference between the two models What is the Fibonacci sequence?
Fibonacci extension will help traders see that the price will follow the Fibonacci retracement level. The Fibonacci retracement level will help you know how deep the retracement goes.
Is Fibonacci always right?
Similar to other indicators in forex, Fibonacci is not 100% accurate. Each trader will have a different analytical ability and perspective, thereby determining the time frame, top, and bottom to draw Fibonacci are also different.
The biggest limitation of What is the Fibonacci sequence?
Fibonacci does not guarantee that the price will react well at resistance and support levels. Therefore, traders need to combine Fibonacci with other types of indicators. At the same time, Fibonacci has many price resistance lines. Since then, the price has reversed back and forth between these lines frequently, making it difficult for traders to determine the standard resistance level.
