For Forex traders, one of the most effective tools to determine support and resistance is Fibonacci analysis. As the name suggests, this strategy uses Fibonacci numbers to identify possible points of entry and exit from the market. The idea behind this tool is that regardless of the currency in which it is operating, there will come a point where prices are back on their employers - the major support and resistance levels will return to their original direction.
The Fibonacci numbers are derived from the calculations of a 13th century mathematician who discovered that all things in the universe follow a pattern. Fibonacci Sequences and their ratios are not only used in Forex but also operational in organic sciences, art, architecture and music. For example, it has been discovered that the seeds spiral of sunflowers are arranged exactly the Fibonacci sequence, while the Parthenon and the Eden Project in St Austell are known to have been designed using Fibonacci numbers.
A Fibonacci sequence is obtained by adding the two previous numbers in the chain. Here is an example of the Fibonacci sequence: 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144 and so on. When applied to forex operating systems, it is important to get the ratios of Fibonacci and the Golden Ratio. To achieve these ratios, you can divide a number by the next highest in the sequence (for example, 34 divided by 55) or split alternate numbers (for example, 8 divided by 21, 12 divided by 34 and so on)
Fibonacci analysis is used as an indicator in the operational advance Forex. This means that the analysis does not delay, making it excellent for predicting trends and determine points back in the forex market even before they occur.
There are two ways in which the Fibonacci ratios used in the operational FX - such as levels of reverse and extension levels.
The Fibonacci retracement levels are used as support and resistance. The three most important levels are 0.382, 0.500 and 0.618. In a graph, two endpoints are chosen and a trend line drawn between the highest and the lowest. The vertical distance from this line is then divided into three main ratios. Three points are required to properly use Fibonacci numbers as a tool - the first two points are used to determine the distance of the first movement and a third point which is the position of the projection. The turning points are used to predict changes in prices and potential returns.
Furthermore, the levels of extension are used as decision levels of benefits. First, a line is drawn from a low to a recent significant relative relative maximum, and then another line is drawn relative to the minimum setback. By doing this, the operator will be able to determine if the market is bullish or bearish. The minimum and maximum oscillation of the graph are also determined, and from here, the trend can be established. The three Fibonacci extension levels are major 618, 1,000, and 1,618.