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A Guide To Mastering Fibonacci Retracement

BitForex Editor
Nov 20, 2020

It is an established fact that the forex market is one that is getting a lot of attention from the populace because of its high-profit returns. However, as profitable as the market is, it can also cause massive losses on traders as the currency market is very volatile. The market is affected by several variables. This makes prices to fluctuate in ways that no one expects. This unpredictable nature of the market is what leads to losses on the part of traders. Still, certain theories have been able to prove that the market can be predicted most of the time provided technical analysis is done correctly. Some of such views include the Elliot Wave Theory and the Wyckoff Method. In addition to these theories, some things called indicators help traders make better trading predictions. The Fibonacci Retracement is a widely used indicator in the trading world. There are several other indicators like Bollinger bands, moving averages, Relative strength index, etc. It is the Fibonacci Retracement indicator we are going to be talking about in this article. This article will let you know all about the Fibonacci Retracement indicator and how to use it.

What is Fibonacci Retracement?

People who are familiar with mathematics would have heard about the Fibonacci sequence. The Fibonacci sequence is a sequence of numbers whereby each number in the series is the sum of the two numbers before it. The Fibonacci Retracement Indicator is based on this sequence. This sequence applies to almost all strata of life, including human anatomy. It was later discovered to be useful to traders and technical analysts looking to predict the direction of prices in the forex market. The Fibonacci Retracement tool shows certain boundaries that price is unlikely to cross, giving technical analysts and traders a hint about where they can buy and sell. The Fibonacci Retracement indicator plots specific ratios into a price chat. When they are plotted into a chart, they will help a trader identify advantageous positions to make correct predictions. The indicators will help you identify the correct entry and exit points, the support, the resistance, etc.

How To Calculate Fibonacci Retracement

It has been explained earlier that the Fibonacci Retracement is based on the Fibonacci sequence that was created in the 13th Century by the Italian mathematician Leonardo Fibonacci. The sequence is just a series of numbers that follow a pattern where every number in the series is adding the two numbers before it. To get this sequence, you don't need to do so much as you could just start with 0 and 1 and work your way up. This sequence has no end. Below is what the sequence looks like

0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 144 and so on.

This sequence brought about the golden ratio, which is 0.618, and it is obtained by dividing a number in the series by the number following it. This ratio is incredibly exciting as a lot of natural phenomena operate with this ratio. Things like atoms, honeybees, shells, and a long list of other natural occurrences obey this golden ratio.

In addition to this ratio, another essential ratio is gotten from this sequence. This ratio is 0.382, which is obtained when you divide a number in the series by the number of two places to its right. The Fibonacci Retracement calculation is based on these ratios.

The good news is you do not need to have all these in mind during trading; you will not have to manually calculate all these as all charts you would want to use already have this automatically calculated. All you need to do is select the Fibonacci Retracement indicator from the list of indicators. However, it is good to have an idea of how these calculations came about.

How To Use Fibonacci Retracement

There are several indicators available to traders in forex. These indications are to be used for different market situations. Fibonacci Retracement indicator is not any different. This indicator works best in a trending market situation. Hence it should be applied in this situation. This indicator is used by drawing a line that will join two important points in the price chart together. These important points are usually the highest point and lowest point on the chart. To use the indicator, you have first to identify the direction of the market, you have to look for markers that will tell you if it is an uptrend or downtrend.

You attach the Fibonacci Retracement tool at the lowest point in the price chart for an uptrend market and drag it to the top. When you do this, you pay close attention to possible support levels: 0.236, 0.382, and 0.618, which are all Fibonacci ratios.

For a downtrend market, you will have to attach the Fibonacci Retracement tool at the highest point of the price chat and drag it to the lowest point towards the right. Likely resistance levels 0.236, 0.382, and 0.618 are then monitored.

Even though the Fibonacci Retracement indicator can sometimes help you make correct predictions alone, it is advisable to use it along with another indicator to see if they correlate before making certain crucial trading decisions. Some of those trading decisions include determining entry areas, stop-loss points, price target, etc. While it is best to use this indicator with another indicator that uses technical analysis, you should stick to using only one indicator alongside it. Throwing in many indicators will get you confused as their results will be very contradictory and will ultimately make you make a wrong decision.

Some other indicators you can combine with the Fibonacci Retracement indicator include the Japanese Candlestick patterns, moving averages, and the Elliot wave theory.

Conclusion

The Fibonacci Retracement tool is a handy indicator in predicting areas of interest. This will eventually lead you to make accurate trading decisions, which will lead to more gains than losses, which is what every trader in the forex market strives for.

The Fibonacci sequence is unique, and its ratio is seen in nature. It has its way of making things look right, and a host of human-made art, architecture, and designs make use of this ratio as well.

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