Friday, September 30, 2011

Forex Investment: How to use Fibonacci Retracements to improve your forex trading!

One of the most commonly used indicators that forex analysts almost always apply at some time or another to their charts are Fibonacci retracements. So, who was Fibonacci?
Born around 1170, Fibonacci was the offspring of a merchant and city official. He grew up to be a famous mathematician, and was the discoverer of the series that we now know as the Fibonacci series. He published his own book of calculations or Liber Abacci where he first printed his series.
The Series
The number series goes like this: 1,1,2, 3,5,8,13,21,34,55,89>>On to infinity. The next number in the series is derived from adding up the last two numbers in the series. 1=2=3, 2+3=5, etc.
Fibonacci Ratios
Paramount to forex traders are the Fibonacci ratios. These ratios are arrived at by measuring the ratio of a Fibonacci number with that of its next highest number. After the first few numbers, if you do so you will see that the result is 0.618 (for example – 34 divided by 55 = 0.618) or close to it. The higher you go; the closer to Phi will be the result.
Similarly, the ratio between every alternate number is seen to be 0.382. For example, 34 divided by 89, and so on. It suffices to say that all Fibonacci retracement levels we use are a ratio of two Fibonacci numbers.
Using Fibonacci Retracements to Trade
When we want to use these Fibonacci retracements, we pick the distance between points A and B for an uptrend where point A is the most recent low point in the trend, and the distance between points A and B for a downtrend, where A is the most recent high point in the downtrend.
In the diagram above, the Fibonacci retracement will be the point C which is the point at which the trend will likely reserve. For the left uptrend, it is the point of low risk where you should consider buying, and for the right downtrend, it is a point where you should consider going short.
Using a Fibonacci Grid
Most people use a Fibonacci grid to help them foresee the retracement levels that a stock will go to. In the diagram given below, drawing the Fibonacci grid from the last low point to the latest high point (35.76 and 40.75 respectively) will give you the popular retracement levels that the stock might fall to in the event of a trend change. Sure enough, the stock goes to its 50% retracement level at 38.27 and reverses course from there. Hence, the 38.27 to 38.88 price range would have been a good low-risk place to buy the stock with a possible stop below the 61.8% retracement level at 37.66.
Your charting software will help you create this Fibonacci grid and even give you options for the retracement levels you want to use. These levels are best used as a guide to determining the possible resistance and support zones that a currency or commodity will stop at during a trend.

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