Successful Forex traders are always looking for techniques and information that can benefit their trading activities. This is where the idea of technical analysis comes into play. Determining the best points of entry and exit in trading requires the ability to make adequate predictions. These predictions are typically based on both projections and historical data, in tandem with various techniques.
One of the best technical analysis techniques available is known as Fibonacci Trading. This is used to establish the connection between support and resistance areas, which allows for the use of historical data to project potential market profits. These profit margins are sought in both rising and falling markets.
The concept upon which Fibonacci trading is based did not originate in the discipline of currency trading. Centuries ago, a famous Italian mathematician by the name of Leonardo Fibonacci took note of the sequence that started this trading method. There was a pattern he deduced that begins with the number zero, followed by the number one. By using simple addition, a sequence is developed with number pairs. The sequence begins with “0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89,” and it continues to infinity. To understand exactly how the figures are derived, see the below steps:
While the numeric sequence is the basis for Fibonacci trading, you should note the numbers are not the focus in the discipline. The important takeaway from the sequence is the ratios involved that separate the numbers. There is a sequence of numbers in the pattern where dividing a number by its successive entry yields a result of 0.618. As an example, consider the numbers 34 and 55, which are consecutive numbers in the sequence. If you divide 34 by 55, the result is 0.618. Furthermore, the ratio of alternate numbers in this sequence is 0.382. Consider the numbers 21 and 55, which are separated by 34 in the sequence. If you divide 21 by 55, the result is 0.382.
These ratios are used to establish the Golden Mean. This is the optimal position between two numbers. Without going too deep into the technicalities, the idea is to determine what are known as the Retracement and the Extension levels.
Retracement levels are used to determine optimal buy-in times using an analysis of support/resistance potential in moving a market. In contrast, Extension levels are used to indicate the optimal time for trade closure. This is optimized for the most profitable outcome. For reference, using the premise upon which Fibonacci sequence numbers are obtained, the following level ratios apply:
Fibonacci trading is such a popular technique because it works. So much so that many traders live by the indications that these ratios provide. These indications are the basis of many decisions in daily trading.
Consider the explanation above of the Fibonacci sequence and how it is beneficial in the world of Forex trading. Though you may understand the premise of the concept and the application of the ratios, attempting to keep track of historical data and making projections manually can be a daunting task. Here are some of the reasons you need to consider implementing Automated Fibonacci trading:
Conclusion
Fibonacci Trading is a popular yet complex discipline. Such complexities are best handled by automated software systems. With such systems in place, all you need to worry about is making good decisions with the insights provided.