Fibonacci Retracement Analysis
In forex trading, the role of Fibonacci retracement analysis is very important, as it helps traders and investors in predicting the turning points of a price trend at a given point of time. For this reason Fibonacci retracement tool is considered the most effective and widely practiced technical tool.
Fibonacci Replacement is a ‘leading’ indicator and not a lagging one, means, it will indicate future trend changes based on current conditions. The tool has got predictive powers of changes in trend
and turning points in prices before they take place.
These levels are formed by drawing a trend line between two extreme levels (high and low) of a main market move, then dividing the vertical distance by the main Fibonacci ratios of 23.6%, 38.2%, 50%, 61.8%, 78.6% and 100%.
Click Here For The Best Courses In Forex Trading
The majority of good charting packages have the ability to do this automatically for you. For example in Metatrader, all you have to do is this: First you choose a main market move, select the Fibonacci button (the one that has a couple of horizontal lines on it, along with the letter “F”), hold your mouse button down, and drag the line from the bottom of the main move, to the most recent top (for uptrends). In market, moves that are moving downwards you would apply the Fibonacci tool starting at the peak of the move. Metatrader then automatically draws in horizontal lines at the main Fibonacci retracement levels.
You may have heard of a famous trader by the name of William. D. Gann who implemented Fibonacci levels in his trading; he also mentions them throughout his books and courses. Of all the levels he talked about, he put the greatest significance on the 50% retracement level. He even went as far as to saying: “you can make a fortune trading this one level alone”. (How to Make Profits in Commodities). Hearing this from such a widely known and very successful trader should not be taken lightheartedly. Although this book was about trading commodities, many traders use the same principals today, in markets around the world, including the forex market.
As a matter of fact, trading in forex can not be solely based on Fibonacci levels. Because, it is difficult to recognize the exact Fibonacci retracement level prices that will retrace. This necessitates the use of other indicators along with Fibonacci retracement tool to arrive at clear picture.
Alternatively, you could observe a candlestick reversal pattern occurring at a key Fibonacci retracement level. For example if a shooting star was formed at a 61.8% retracement level, this would indicate that prices have reached a natural resistance level, and price action is telling you it is time for a reversal.
Traders heavily depend upon Fibonacci retracement analysis to determine possible reversal points of price movements and trend. The key attraction is its power to predict the trend, which enable traders to take advantageous or safe positions in the market in advance. However, as in the case of any other technical tool, Fibonacci retracement analysis has to be applied in conjunction with other tools to make it more effective and useful.
