16 September 2015

Trading Forex: Fibonacci retracement

Find out what is Fibonacci retracement and how it is related to forex trading.

​​You may have heard of the Fibonacci Sequence - this is a concept developed by Italian mathematician Leonardo Fibonacci, whereby, in a series of numbers, a given number is the sum of the two numbers which came before it in the sequence:

 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, …
 
In the context of forex trading, the relationship between these numbers may help traders identify common patterns, and forecast future corrections or bounce-backs following a decline. Its use in technical analysis is called the Fibonacci retracement. It refers to the points at which the price of a currency encounters either resistance or support.
 
This method may also help identify patterns in currency prices, indicating where price targets or stop losses should be placed to maximise the chance of gains. The logic behind it is that asset prices often pull back or retrace a percentage of their previous move before reversing again. 
 
To identify Fibonacci retracement levels, you need to look for recent swing highs and lows in the price of a particular currency. You then add in your Fibonacci levels between these two markers.
 
Retracements frequently occur at three levels: 38.2%, 50%, and 61.8% - when an asset price reaches these levels, traders watch closely for signs of a reversal. Reversals can happen at these points in either upwards or downwards directions, although there are no guarantees. You may use other technical signals alongside Fibonacci to confirm a reversal.
 
This technique tends to work best when the forex market is trending in either direction. ​

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The value of your investments can go down as well as up.
Losses can exceed deposits on margin products. Please ensure you understand the risks.