Recorded to have been started by a man named Leonardo Pisano more than a millennium ago, Fibonacci retracement patterns remain a robust tool for trading today’s financial markets. It has acquired several modifications to its original version, yet the interpretation of the data presented remains the same. So, what is Fibonacci retracement? How does it work? More importantly, how can a trader, irrespective of skill level and background, use it to profit from the Forex market?
What is Fibonacci Retracement?
To better understand the retracement as a tool to Forex trading, one must first understand the number sequence. In the Fibonacci sequence, following zero and one, each digit is the sum of the two numbers coming before it. As a result, the sequence goes like this – 0, 1, 1, 2, 3, 5, 8, 13, 21 and so forth. Each digit will be exactly 1.618 times higher than the digit preceding it. This is where the Golden Ratio, 1.618, comes from.
How it Works
The price levels focused on while using Fibonacci retracement in a trading context is not a set of numbers, but rather a derivation from mathematical connections between the said set of numbers. Three sets of numbers are the only ones you will be focusing on, namely 61.8, 38.2, and 23.6. Fibonacci levels are generated by taking low and high data points on a price chart and marking key ratios from left to right to create a grid.
Using Fibonacci Retracement
Fibonacci retracement can be found included in many trading platforms, such as MetaTrader, under the Indicators or Tools tab. Some will display it with an icon “F”. Either way, using the tool can be confusing for first-timers. The retracement indicator will have a set of levels displayed around your price chart. Drag the indicator from its clickable sides and then position it to where you want to evaluate price levels. Once the retracement layout is set, you can now see price action with major retracement levels alongside minor ones including the 7.64 percent.
How to Improve With Fibonacci
Theoretically, it seems simple enough to trade Fibonacci retracement patterns. However, a rigid approach to trading is always ill-advised, mainly due to the fact that uncertainty and risk are omnipresent in the markets. Moreover, big players including hedge funds are already anticipating retail traders to use the key levels of a Fibonacci retracement indicator to trade. This means they can trade on the opposite direction at much larger position sizes hence you lose. Instead, use the tool in context with what price is doing.
As well as Fibonacci retracement can help you identify key levels in price action, Fibonacci extensions can compliment such approach by giving you sensible profit targets based off of Fibonacci calculations. Extension levels may also be included in your trading software, yet others do not. You can easily download and install Fibonacci extensions for free online. Key extension levels traders focus on include the 161.8 percent, 261.8 percent, and 423.6 percent.
Choose the Right Broker
Make sure you choose the right company, like Royal Capital Pro broker, that can provide a trading platform with built-in Fibonacci retracement indicator. If not, it’s possible to download the tool and import it into your trading platform. However, the latter option requires a good amount of technical prowess and experience.
Fibonacci trading is a simple but powerful approach in Forex. The back-end calculations used to derive the price levels are smoothed out and simplified to give traders in the front-end an easier time in analyzing market patterns. In addition to technical analysis, you’ll also want to complement Fibonacci trading with risk management.