How to Use Fibonacci in Forex
The Fibonacci sequence is a mathematical pattern often found in nature. The field of technical analysis of Forex (foreign exchange) price charts can use an application of the Fibonacci pattern to analyze the "natural" fluctuation of prices. Whether or not you believe in the theory of Fibonacci price action, this tool does often become a self-fulfilling prophecy. When many traders all perceive a particular price level to be significant, their combined actions do indeed often cause that level to function as a price reversal. Calculating Fibonacci levels in Forex trading is not difficult, and most trading platforms will do it for you.
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Instructions
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Fibonacci Tools in Trading Software
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1
Open your trading platform and plot a Forex price chart.
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2
Locate recent high and low points on the price chart. Fibonacci patterns are used to determine the fluctuation that may occur between these points. Any two points will do, but the most obvious high and low points in the recent price action of any time frame are more likely to be watched by traders worldwide. On a daily chart, for example, the lowest and highest prices of the year could be used.
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3
Click on the Fibonacci "retracement" tool in your trading platform. Most trading software offers many technical analysis tools, including Fibonacci analysis.
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4
Drag the mouse between the two points you selected, starting with the price level that occurred first. Most Fibonacci software tools require that you click and hold down the mouse as you drag over the price chart to establish the price range you wish to analyze.
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Lift up on the mouse. The trading software will create several horizontal lines on the chart between the two price points you selected. These lines are potential reversal points as price fluctuates between these two extremes. As prices move near these areas, be on the lookout for changes in trend when trading Forex.
Manual Fibonacci Calculation
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Select two price extremes on a Forex chart.
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Subtract the lowest extreme from the highest extreme. This is the trading range.
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Multiply the trading range by 0.382, 0.500 and 0.618 to create three results.
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Add each of these results to the lower price extreme of the trading range. You now have three potential reversal levels that could influence Forex trading between these two extremes.
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Tips & Warnings
Treat Fibonacci levels as potential areas of interest, but never base trading decisions solely on these calculations. There are many complex forces at work in the Forex market, and many traders are not influenced by Fibonacci calculations.
References
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