Fibonacci for Forex Trading - How to Use Fibonacci Ratios in Forex Trading

 

The Fibonacci sequence is a series of numbers directly derived from nature and is used in organic sciences around the world today. In the Fibonacci sequence, every next number is the sum of the proceeding two numbers. For example 1+1=2, 2+1=3, 3+2=5, 5+3=8, etc. Therefore the Fibonacci sequence starts with: 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144,... Now the beauty of this sequence is that it mimics the natural world around us. For example, the seeds in a sunflower are exactly ordered as in the Fibonacci sequence, but there are many, many more examples to be found in the organic matter around you.

Fibonacci ratios are found by comparing the relationship between the numbers in the Fibonacci sequence. For example, if you take every eight number in the sequence and divide it by the number following it, the answer will always be ~.618. The most important ratios are.236, 50,.382,.618, 3764, 1.382, 1.618, 2.618, 4.236, and 1.00.

Fibonacci in Forex trading

Everybody who has ever looked at a chart knows that prices never move in a straight line. This is because the Forex market is full of sentiment and personal feelings. A lot of traders don't have a good trading system in place and let their emotions take control. Especially when a sudden price drop occurs.

That's why the Forex market behaves very much like an organic system. This is especially true after a large price move has occurred. At that point, the market is filled with sentiment and people start to worry and let their emotions take control. This natural process causes the price to retrace finding support at an organic level. Because the market is behaving like an organic system, it is very easy to predict these levels using the Fibonacci ratios.

How to trade using Fibonacci retracements

Before we can trade using Fibonacci retracements we need to identify the big moves that will cause the market to go in an organic state. You can do this by simply looking at the chart and looking for signs that a move has consolidated. But to be safe I would recommend looking for confirmation by other indicators like MACD and Stochastics.

Once you have confirmation that the move has consolidated, calculate the total value of the price move. Using the Fibonacci ratios (.382,.50 and.618) calculate the tree main price targets of the retracement. For example, if the price moved 100 pips down during the last move, your price targets will be 38, 50 and 62 pips above the current price level.

Now place your buy order and watch your indicators as the retracement develops. It is very well possible that the price will first hit the.382 level then drop again to the point where you placed your order before retracing all the way back to the.50 or.618 level. Therefore you should always use other technical indicators to determine if a retracement will break through a price target or not.