What is Fibonacci Trading?

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What is Fibonacci Trading?

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Fibonacci number series was made famous by the Italian mathematician Leonardo
Fibonacci and most traders have had some sort of exposure to the price retracement
aspects of Fibonacci. Many traders have been using this technical analysis tool for
years to help recognize price support (downtrend) and resistance (uptrend) points. The
Fibonacci price retracement techniques are one of the technical analysis tools that a
trader has in his toolbox.

The number series starts with a 0 and a 1 and runs to infinity with the next number in
the series being the sum of the prior two numbers. (0, 1, 1, 2, 3, 5, 8, 13, 21, 34 on to
infinity) The interesting thing about this set of number is that there is a relationship
between them which is 1.618. For example if we take the number 8 and multiply it by
1.618 it equals 13.

The Fibonacci numbers are run from a low to high swing using 0.382, 0.50, 0.618 and
0.786. The numbers used for a high to low swing use the same ratios. Sometimes 0.236
is used if the swing is long enough. The numbers 0.618, 1.000 and 1.618 are used as
profit target levels.

In this GBP/JPY chart covering a few hours, we are noting the resistance levels as the
price moves up from its low. The first retracement resistance level is 0.764 and the final
retracement resistance level is 0.382 before the price makes a big swing upwards. If
you had bought at the low and set your profit level at 0.382 you would have taken your
profit before the small reversal.

In the following example we show the line trace from the highest point to the lowest
point of EUR/USD over several hours as it moves from a high of 1.2466 to a low below
1.2300. It shows the support levels at 0.618 where a retracement occurs, at 0.500 and
at 0.236 before a fairly big downward swing.

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As shown in the above couple of charts stocks and currencies will often fall back or
repeat a percentage of the previous move before reversing. This Fibonacci retracement
occurs at three points, 38.2%, (0.382) 50%, (0.500) and 61.8% (0.618). When the
currency begins to retrace, you can chart these retracement patterns on the chart and
look for hints of a reversal in the price. It is not necessary to do something simply as it is
at a retracement point! Take your time and look for candlestick patterns to build up
around the 38.2% area. If you don’t spot a reversal look for a reversal at the next level.
You never know if a currency will reverse at a common level! So just note these areas
on a chart and wait for a forex signal to buy or sell.

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Trading in the Foreign Exchange market might carry potential rewards, but also potential risks.
You must be aware of the risks and be willing to accept them in order to trade in the foreign exchange market. Don't trade with money you can't afford to lose.

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http://www.etoro.com/education/what-fibonacci-trading.aspx 4/17/2011