Use of Fibonacci Ratios in Forex Trading

The site has been named "FibForex123" for the simple reason that the two tools of "Fibonacci ratios" and "The 1-2-3 chart pattern" are the foundation of our technical analysis.

Fibonacci ratios
They are a very popular tool among technical traders and are based on a particular series of numbers identified by mathematician Leonardo Fibonacci in the thirteenth century.

The Fibonacci series 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 sequence continues infinitely. However, the sequence of numbers is not as important as the mathematical relationships, expressed as ratios, between the numbers in the series.
One of the remarkable characteristics of this numerical sequence is that each number is approximately 1.618 times greater than the preceding number.
This common relationship between every number in the series is the foundation of the common ratios used in retracement studies.

The key Fibonacci ratio of 61.8% - also referred to as "Golden ratio" or "Golden Mean" - is found by dividing one number in the series by the number that follows it. For example: 8/13 = 0.6153, and 55/89 = 0.6179.

For some reason, these ratios seem to play an important role in the financial markets, just as they do in nature, and can be used to determine critical points that cause price to reverse.

Price action is never random, and every wave leaves behind the clues for the next move. We can thus, use the previous price action to determine the anticipated price movement.

Most of the technical analysis that we follow is based on Fibonacci ratios.
Price has an uncanny way of respecting Fibonacci ratio's, often quite precisely. Frankly there is nothing magical about these numbers, and price reacts at these levels simply because a majority of traders are following the ratios.
But instead of following the masses, we use the various Fibonacci ratios in a different way which gives us an edge over the crowd.
Another common mis-interpretation of the Fibonacci numbers is that traders tend to use the same Fibonacci ratio for all kinds of situations.
Just like the different tools in a carpenter's tool box, each ratio should be used in a particular situation.
While you obviously cannot use a hammer for a job that requires a screw driver, similarly you cannot use Fibonacci retracements in a situation where the Fibonacci fans are required.

We have clearly defined the use of each Fibonacci ratio for a particular setup, which gives us a tremendous advantage over the crowd.
We use the following Fibonacci ratios for analyzing the price action, and described in brief, are the various situations that we use them for

Fibonacci retracements and Fibonacci projections -

Fibonacci retracements -
The basic use of Fibonacci retracements is to find potential levels of support or resistance "behind" the market. If the market is moving up and making new highs, Fibonacci retraces will draw levels BELOW the current price.

Situations in which to use -

1.) For price in an existing trend - to estimate the horizontal levels of support/resistance in case of a pullback.
2.) For a regular divergence - to determine the correct entry into the changed trend.
3.) Elliot waves - go hand-in-glove with Fib retracements.

Fibonacci projections -

The Fibonacci projections are used to determine the expected price targets, once it has crossed the Fibonacci retracement levels.

If we are anticipating price to begin a downtrend, we can use the last prominent up wave to determine the expected down targets. Thus we are projecting the price action forward, using the last prominent moves.

Situations in which to use -

For estimating the price targets for a divergence setup - we project the price action forward, estimating that it will reach the fibonacci levels.

Fibonacci expansions -

The fibonacci expansions determine where prices could potentially move to. The advantage is that these levels are drawn "front" of the market. It isn't as widely used by traders and that can be an advantage.

Situations in which to use -

1.) To determine the future levels of support/resistance.
2.) For a 1-2-3 formation
3.) For a hidden divergence.

Fibonacci fans -

The Fibonacci fans are diagonal lines that use Fibonacci ratios to help identify key levels of support and resistance.

Situations in which to use -

1.) To determine the future levels of support/resistance
2.) For price in an existing trend - when price has a pullback/retracement, and we need to determine the extent of this pullback.
3.) For a hidden divergence - to confirm if the hidden divergence remains valid.

The 1-2-3 chart pattern.

This is one the best and simplest chart patterns that one could come across. This continuation pattern is easy to use, and can be found in all kinds of price situations - within an existing trend, within a trading range, at the end of a retracement and most importantly, it signifies a change of trend.
Just like the Fibonacci ratios, we have clearly defined the situations where this pattern would occur, and devised the ideal tools for trading it.

 

 
 
 
 

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