The Fibonacci sequence
describes key ratios from growth in plants, human anatomy, and so on.
The forex application is to price movements, which appears to realize
Fibonacci ratios. This is particularly obvious on larger time frames
such as weekly, daily, and 4-hour time charts. A large move from a
low to a high is often followed by an attempt of the price to move
back or “retrace” the original move. These areas of rest are
Fibonacci points. For example, let’s look at a chart showing a
price move on the euro–U.S. dollar (EURUSD) 4H chart chart (see
picture1).
We can see that the
EURUSD made a low at 1.3525 and then proceeded to forma high at
1.3637. Once this move was completed, the trader can use a Fibonacci
(Fib) graphic tool, which is available on all platforms to draw a Fib
line. The Fibonacci retracement are:
23.6% the shallowest of
the retracements;
38.2% this is the first
line of defense of the current trend.;
50% the neutral point of
any retracement.;
61.8% retracing to this
typically signals a breakdown in the trend;
100% matching the move;
other potential lines
are: 138.2% , 161.8%, 200%.
Since the price started
from the low, the Fib tool assigns the 100 percent level to this
origin point. The best way to interpret this is to think of the price
going all the way back home to where it started. It would achieve a
100 percent retracement. Once the low and the high are connected, the
Fib graphic tool draws the lines and projects it out. Notice that
these Fib lines are extended into the future. The trader doesn’t
know if the price will get there! The trader makes the assumption
that if the price is able to get to a Fib level, it will experience
strong support or resistance. Also, if the price is able to probe a
future Fib level but fails to go through it, the trader can make a
reliable assumption that there is key support at that level.The
price moved from the low of point A to the high of point B and then
proceeded to retrace or fall back.
The Fibonacci levels
are maps of potential support or resistance. They are areas where
great care should be taken by the trader. Rest assured that any
professional trader knows where the key Fib levels are. Perhaps
because these levels are projected and therefore known in advance,
they generate a self-fulfilling process and increase in importance. |
The price moved from
the low of point A to the high of point B and then proceeded to
retrace or fall back
|
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