Using Fibonacci Charts For Forex Trading
The Fibonacci chart method used for forex trading or other monetary trading depends
on an arithmetic progression invented by Leonardo Fibonacci of Pisa, Italy, in the 13th century. He showed that if you create a succession of numbers by continuously adding together the last two figures together, i.e. 0, 1, 1, 2, 3, 5, 8, 13, 21, 34 and so on, the ratios connecting the numbers stick to certain interesting patterns which are often reflected in the physical world. For instance if you take a leaf and work out the ratio between its width and its length, you will often discover one of Fibonacci's ratios. Why this should be correct in so many instances is one of the mysteries of the natural world.
But on a practical level and getting back to forex trading, these Fibonacci ratios are in addition often seen in swing pattern arrangements which includes price movements. The most notable ratios for forex trading are 0.236, 0.382, 0.500 and 0.618. These can be used to predict particular price movements, particularly retracements or reversals in a trend.
You will know that each time you have a strong trend with movement in one particular direction over a period of time, throughout that time there will be moments while the price reverses for a brief retracement ahead of continuing on its way in the direction of the trend. Retracement lines can therefore be drawn which can play a role as support and resistance levels.
In many instances the movements or fluctuations visible in a forex chart will reproduce almost exactly as one of the ratios exposed by Fibonacci. If you watch and determine these for a time using the Fibonacci chart values you will be amazed how often this is confirmed.
It is furthermore feasible to draw on extension lines using Fibonacci ratios to predict how far a movement will proceed ahead of a turnaround. If you can resolve this accurately it enables you to take the most profit from a trend so you can imagine how valuable this can be.
For this purpose there are many systems structured around the Fibonacci chart method of technical analysis. The major point to make in relation to them is do not be too concerned about the math at the beginning. It's a fascinating topic and the majority of systems will at least attempt to explain it for you, but you do not in reality need to know why this works at the beginning of your forex trading career. Just go along with the method for now and you will discover that it is not too complicated.
In truth, since these ratios appear so often in nature and generally in our own lives as a whole, systems structured on Fibonacci can often seem intuitive. Take the trouble not to be fooled into thinking the method is structured around intuition, however. That is not accurate at all. You will still need to apply all the usual cautions and be constant in your application of the method whilst you are using Fibonacci chart methods for forex trading.
by: James Roshwood
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