Good Morning! Lets discuss about Fibonacci Retracement today.
If you have been trading for sometime now, you would have probably heard about it.
Where did Fibonacci numbers come from?
The Fibonacci sequence was well known in ancient India.
It was introduced to the west when Leonardo of Pisa returned from his travels overseas and wrote a book “Liber Abaci”, which introduced Hindu numerals.
Basically, the next number in sequence is the sum of the 2 preceding numbers.
Starting with 0 1 1 ( 0 + 1) 2 (1+1) 3 (1+2) 5 (2+3) 8 (3+5) You end up with 0 1 1 2 3 5 8 13 21 34 55 89 . . .
The sequence can interestingly be observed in various forms in nature!Like the spirals in the sunflower.
Fibonacci in Forex
Fibonacci is used in Forex in various ways.
Today’s discussion focuses on Fibonacci Retracement.
Fibonacci Retracement is commonly used to identify possible support and resistance levels after a major trend has ended.
The first step in applying Fibonacci Retracement is to determine the extreme points of the trend.
In this weekly chart of the EUR/USD, i chose the top of 1.6035 and the low of 1.2329.
Note that the levels draw here are not the actual numbers but rather ratios derived from the relationship of the numbers.
For example, dividing 1 number by the sum of the next 2 numbers gives 55/144 = 0.3819.
I have circled in red the areas where the price had a form of reaction to the levels.
Doesn’t look too much of a coincidence does it?
Traders usually use this to anticipate supports in corrections of the current trend to add to their positions or resistances in the current trend to attempt to pick a top / bottom.
The fact that many traders pay attention to such levels, apparently makes it self fulfilling.
Having said so, you should never rely on one indicator to make your decision.
I see this as a additional clue for me to pay attention to and in Forex, every clue helps!