Born in 1170AD, Leonardo Fibonacci was a famous mathematician and from his work, the world got to know what the Fibonacci sequence of numbers is and the well known Fibonacci golden ratio. The Fibonacci sequence is a series of numbers where the next number is the sum of the two previous numbers.
Let us understand why is it so important for technical traders:
What is the Fibonacci golden ratio?
The focus here is around the fact that what is the ratio between the numbers that are in the sequence. This is the most substantial work of Fibonacci. Any number in the series, if divided with the previous number of the series, gives a remainder of 1.618, as the series further progresses. This is called the golden Fibonacci ratio. There are plenty of patterns following the same trajectory in nature itself. The ratio is rumoured to have been the powerhouse of the basic building blocks of probably everything we see around us. For example, the ratio of the length of the forearm to the length is 1.618
Fibonacci Retracement and Stock Price prediction:
For unknown reasons, there is an important role that the Fibonacci patterns seem to follow in the stock market. The technical indicators attempt to make use of them at critical points where the momentum in terms of price can potentially reverse.
Fibonacci retracements are one of the most widely used platforms and tools. This is because of their applicability in almost all the trading instruments and their usability. Retracements can be used to draw the support lines, stop-loss orders and identify the resistance levels. They are also the primary base for counter trend trading strategies.
The Fibonacci retracements are lines that primarily indicate what are the possible locations of the support and resistance. Each level is associated with the percentage and ratios. This shows that how much of the move in previous times has the price retraced. Is there a direction that the previous trend is likely to continue?
The direction of the previous trend is likely to continue. However, the price of the asset usually retraces to one of the ratios listed above before that happens.
The following chart illustrates how a Fibonacci retracement appears. Most modern trading platforms contain a tool that automatically draws in the horizontal lines. Notice how the price changes direction as it approaches the support and resistance levels.
How To Trade with Fibonacci Retracement Levels
So far you have learnt that in an uptrend Fibonacci retracement levels can act as a support level where price may bounce and continue moving higher. Conversely, in a downtrend Fibonacci retracement levels can act as a resistance level where price may bounce and correct lower. You have also learnt how to plot these levels using the Fibonacci indicator in the MetaTrader trading platform provided by Admirals, as well as how to use Fibonacci extension levels.
Both Fibonacci retracement levels and Fibonacci extension levels are used by a wide variety of traders covering different trading styles and timeframes, such as long-term trading, intraday trading and swing trading. The levels are also used across different markets such as Forex, Stocks, Indices and Commodities.
While the next section will focus on a Fibonacci Forex trading strategy, you can apply and test the same principles on other asset classes. In fact, with Admirals you can access a wide variety of different asset classes completely risk-free by using a demo trading account. This will also give you the chance to practice and test your Fibonacci trading skills with zero risk
Fibonacci Trading Styles
Every trader is having its own unique strategy. Fibonacci trading strategy uses hard data. It can be applied in both for long term or short term from single minute trade to years of period.Due to the nature of currency changes, however, most trades are executed on a shorter time horizon.
Bottom Line:
Forex trading is most volatile market is the world. Over 6 trillion daily trades execute in the forex market. Everyone wants to try their luck in the fx market. You can make good amount of money if you have the proper trading style and perfect understanding of the market. The broker plays an important role in your trading therefore choosing the right brokerage firm is important. ROinvesting is the leading online broker that offers trading on more than 350+ trading instruments with advanced trading platform.
