Forex & Fibonacci Levels
Fibonacci levels are some of the most widely used technical indicators in the forex, or foreign exchange, market. They may be used in any forex market and in any time frame. Many technical traders use Fibonacci levels as part of a larger technical analysis strategy when trading forex.
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Fibonacci Levels
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Fibonacci levels are derived from the golden ratio of 0.618 to 1. In the forex market, these levels are expressed as percentages of a price range. When Fibonacci levels are plotted on a forex chart, the selected range is viewed as being equal to one and levels are plotted at 38.2 percent, 50 percent and 61.8 percent within the range. The 38.2 percent level may be thought of as 61.8 percent as measured from the opposite end of the range.
Forex Charts
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Any kind of forex chart may be used when plotting Fibonacci levels. Some examples include bar charts, candlestick charts and point and figure charts. As long as a trader has a graphic chart of forex prices, he can plot Fibonacci levels on top of the price data.
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Price Range
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Typically, traders use the high and low of a price chart as end points for a Fibonacci range. Sometimes, multiple ranges are constructed from other points such as secondary highs and lows as well. The time period of the forex chart is not important, as Fibonacci levels may be used on prices within any time frame. For example, a short term trader may use a 5-minute chart; a swing trader may use an hourly chart; and a long-term trader may use a daily chart.
Support and Resistance
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The goal when plotting Fibonacci levels is to locate areas of support and resistance. Support is defined as a level where falling forex prices are likely to rally, while resistance is defined as a level where rising forex prices are likely to stall. While this concept is the basic idea behind calculating Fibonacci levels, there are additional theories that are accepted by many technical forex traders. For example, some traders feel that areas of support and resistance are interchangeable.
Practical Use
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Most forex traders who employ Fibonacci levels use them as potential entry and exit points for a trade within the context of the overall market trend. For example, if a currency pair is in an up trend, but pulls back to a Fibonacci support level, this is viewed as a potential buying opportunity. Likewise, a short rally up to a resistance level in a larger down trend is viewed as a possible selling point. Often, other technical indicators are used to confirm buying and selling signals at Fibonacci levels.
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