How to Use Fibonacci for Forex Trading

06/03/2013 9:00 am EST

Focus: FOREX

In forex trading, Fibonacci retracements can identify potential reversal, support and resistance levels, notes Adrian Friggieri of DailyForex.com, so it's useful to learn how to use this tool.

Amongst a lot of tools in our trading box we should find something very interesting called Fibonacci lines or also called Fibonacci retracements. Most, if not all trading platforms, being Web-based or desk top applications contain a large number of productive and research tools that will help you analyze the markets and the trading pair you have in front of you.

Fibonacci for forex has been more than useful in assisting the fellow newbie and the pro trader alike in understanding strong points of reversal, support, and resistance. All these are more than useful during your trading day in order to define potential entry points, market reversal points, and also your exit strategy. If it is not your main trading strategy that you are relying upon, with Fibonacci you could use the lines to confirm your own entry or exit strategy.

How to Draw Fibonacci Lines
The Fibonacci sequence of numbers is as follows: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, etc. Each term in this sequence is simply the sum of the two preceding terms and the sequence continues infinitely. Fibonacci ratios are mostly expressed and drawn with the following points of 23.6%, 38.2%, 50%, 61.8% and 100%.

chart
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In the diagram below, we have drawn Fibonacci lines for daily cable. We have joined up the lowest market point to the highest market point and the % values are calculated on its own by our trading platform. Fibonacci for forex has been a strong understanding of key trading points, usually this would highlight key support and resistance points that would be very significant during your trading day.

Most probably, if you draw main Fibonacci lines for a typical trading day, you would notice that the main lines would have served for reversals, support, or resistance for a number of times.

Depending on the timeframe you are using, of course, but occasionally one could also notice that Fibonacci lines would be retouched after some hours or even days. Again this depends on your timeframe analysis.

Fibonacci for forex is a strong tool that should be utilized by all fellow traders in order to help them take trading decisions.

By Adrian Friggieri, Contributor, DailyForex.com

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