Who would even know that a mathematical concept that was developed during the 13th century would have a lot of applications at the present time? The Italian mathematician Leonardo Fibonacci lived between 1175 and 1250, but his Fibonacci theory lives on until today.
One of the areas of application of the Fibonacci is in the forex trading industry. When you ask the best forex broker, he would not hesitate to say that it is one of the most commonly used technical analysis tools for forex analysis.
It is a bit simple to understand the Fibonacci theory. This concept simply states that each term in a certain sequence of numbers is the sum of the two previous numbers (e.g., 1, 1, 2, 3, 5, 8, and so on). Although this sequence is not particularly important to understandFibonacci for forex, the power of the “Golden Ratio” is.
Basically, this Golden Ratio is the quotient of the adjacent terms and that is 1.618 or 0.618 as an inverse.You may be asking, why is this number so important? Well, go ahead, search about this on the internet and you will be surprised to see the various practical applications of this number.
However, the more important question is how it can be used to make a trading strategy more profitable? When used in forex analysis, the Fibonacci’s Golden Ratio is translated to 38.2%, 50%, 61.8%. Five lines are marked on the chart: these three levels, 100% and zero percent. Obviously, zero percent is the low and 100% is the high.
The interesting thing about these Fibonacci levels on the chart is that they often act as support and resistance levels or points where the prices start to rebound. On a traditional Fibonacci chart, a currency pair that has recoiled from the 100% level will more likely find support at the 61.8% level. If the currency pair does not find support at that level, that is a signal to sell it short. With this, it can be said that the Fibonacci theory is a helpful tool for trend traders.
The Fibonacci can also be a useful tool for short-term trading. For traders who perform scalping as a part of their trading strategy, Fibonacci charts are a necessary component on their trading platform. When you take a look at a long-term chart, such as a daily chart, and then draw Fibonacci lines, you will be able to see examples of Fibonacci lines that act as levels where a previous price tend begin to reverse.
Short-term forex traders are frequently getting thrown around by price movements because these traders fail to properly identify the most essential price levels in a certain currency pair. Correct usage of Fibonacci lines can help prevent this issue and put the odds in favor of the trader.
All forex traders should know that trading against the trend is risky and that all kinds of forex analysis needs to involve trend identification. Among the various tools, the Fibonacci is one of the best that can keep a forex strategy on the right side of the trend.