As most of you know that the forex market basically moves in waves and there will be time where the market extends and there will also be time where the market retraces.
One of the best forex indicator that you can use to time this retracement and extension is the forex Fibonacci levels.
So What Exactly Is Fibonacci?
It is a number sequences that is named after Leonardo of Pisa and the Fibonacci number sequences goes like this
0, 1, 1, 2, 3, 5, 8, 13 and so on. (Add the first 2 numbers to get the next)
However in trading, we are not interested in the sequences, we are actually interested in the Fibonacci ratio that the sequences create.
These are the ratio that we use as a forex trader.
Below are the retracement ratios
Below are the extension ratios
So How Can You Use These Ratios In Trading?
The Fibonacci ratio is in fact used as a level of support and resistance. These are areas where you will SELL or BUY depending on what you see and where you are.
Although there are quite a number of ratios given above, the important ones are the 0.382, 0.500, and 0.618 as they are usually area of strong support when the price retraces down and area of strong resistance when the price retraces up.
Here Is How You Should Plot Your Fibonacci Levels In An Uptrend
Step 1: Using the tool provided by your platform, Pick a high point and a low point
Step 2: Select the levels that you want to display. (We will select 0.382, 0.500, 0.618, 1.272, 1.382, 1.500 and 1.618)
If you are in a downtrend, all you have to do is to switch the step 1 points.
In the case where you are in an uptrend, you will find that the retracement of your price will usually land on the 0.382, 0.500 or the 0.618 level as these are area of strong support and the price will then extend up to continue in its uptrend movement.
If you ever find the price moving below the 0.382 level, there is a high chance that the trend is reversing.
In the case where you are in a downtrend, the market will retrace upward and it will also find its resistance at 0.382, 0.500 and the 0.618 levels. Similar to the uptrend, if the market retraces above the 0.382 level, there is a high chance that the market is reversing.
In my next blog post, I will show you how to trade using Fibonacci Strategy and how you can make use of the 1.272, 1.382 and the 1.618 levels. In the meantime, you should try to plot the Fibonacci levels on your chart to see the power of it.