The Fibonacci Method in Forex
Currency trading is a challenging discipline even for experienced investors, and anyone involved in this market will naturally seek out reliable systems and trading signals to give themselves an edge. One technical system, known as the Fibonacci method, relies on key mathematical ratios that some believe can provide a good indication of the best time to buy or sell.
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History
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The Fibonacci series was first described in a thirteenth-century mathematical treatise written by the Italian scientist Leonardo Fibonacci. The numbers continue in a sequence in which the ratio of one number to the next larger in the series is constant. A simple calculation translates these ratios into two key percentages: 38.2 and 61.8.
Application
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The Fibonacci series and corresponding ratios can be derived from the construction of many natural and man-made objects. They are present in music, architecture, and in the calculations of physicists and mathematicians. Many people believe the Fibonacci ratios can also be seen in the price movement of securities as well as purely speculative investments such as currencies.
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Technical Trading
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Using the Fibonacci percentages on currency trading price charts is fairly straightforward, for those with the proper software or online trading platforms that offer Fibonacci charting. Traders first identify an important price trend over a specific period of time, such as a single day, a month, or as long as several years. The trend can be rising or falling, but it must have a starting point, at which the price reached a high or low level and then reversed.
Support and Resistance
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The Fibonacci ratios are calculated as a percentage of the total price movement over the length of the trend. For example, if a currency moves up 100 points and then reverses, a Fibonacci level is reached at 61.8 percent of the previous change in price, from low to high. That level is a crucial point for traders, and future price moves can be forecast from what happens when the currency's value reaches the Fibonacci ratio.
Key Levels
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The Fibonacci level represents a key point of support or resistance. A falling price will either rebound from the support level, and begin rising again, or break through support and continue falling. The movement of the currency at this support or resistance (in the case of a rising price) level provides a signal to traders using the Fibonacci method.
Effects
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Many currency traders consider Fibonacci support and resistance levels when planning their trades. In the absence of significant news affecting currencies, when their prices seem to move randomly and unpredictably, the Fibonacci method allows traders to use a structured mathematical system to make a profit. It works because many other traders are also using Fibonacci ratios, and buying or selling according to this familiar system, thus moving the market collectively in the direction they want.
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References
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