A Brief Introduction To Fibonacci Forex Trading

Fibonacci Forex Trading is the foundation of many Forex Trading Systems that are used by a wide range of professional Forex Traders around the world. Trading systems based on this “numbers sequence” are so successful that more than a few billions of dollars are created every year by traders following its simple rules.

Leonardo Fibonacci was an Italian mathematician, considered by some to be the greatest mathematician of the middle ages, is best remembered by his world famous Fibonacci sequence. The definition of this sequence is that it’s formed by a series of numbers where each number is the sum of the two preceding numbers; 0, 1, 1, 2, 3, 5, 8, 13 … But in the case of currency trading and really stock market trading as well is the Fibonacci ratios derived from this sequence of numbers, i.e. .236, .50, .382, .618, etc. This has been sometimes called the Golden Ratio. Google it and you will be amazed how often it comes up.

Forex traders use these mathematical proportions to their advantage due to the fact that the oscillations observed in Forex charts, where prices are visibly changing in an oscillatory pattern, are known to follow Fibonacci ratios very closely as indicators of resistance and support levels. This has been studied and re-studied for over a hundred years now with the stock market also, but it is so close as to be really amazing. It is believed by many that nature can be explained mathematically and this is another example.

Additionally, one important thing to remember is that Fibonacci technical analysis is a leading indicator. What this means is that by learning the correct Fibonacci trading strategy and techniques you will know how to determine the most probable turning points in the market before the price gets there. You can know what the Forex market will do in advance! Or at least have an extremely better chance than you would any other way.

For example, one of the commonly used Fibonacci ratios is the 0.382 ratio. As it can be easily seen on any Forex chart, the currency prices are continually changing and they follow an oscillatory pattern with peaks and valleys. The limit of the peak is usually called a resistance level while the valley is usually called a support.

In order to find the 0.382 ratio level what you do is, first; measure the size of the drop or rise over your time of interest. Once you have that value you multiply this by 0.382. Now depending on what you are looking at, a rise or a drop on the price of the particular “currency pair” you are trading, you will add the last value you calculated to the total drop or subtract the value from the total rise. This is much easier to see than to be explained. Any decent trading software has Fibonacci ratios as part of its repertoire.

Once you have the value you can then start planning the strategy you will follow in order to make a high probability profit from this important information. For the 0.382 ratio level calculated for a recent rise in the “currency pair” exchange price, your calculated level will be a highly probable support and for the case of a level calculated for a recent drop of the prices your level will be a highly probable resistance.

Many professional investment people try to make this type of technical analysis overly complicated, thus scaring away many new Forex traders that are just beginning to understand how the Forex market works and how to make a profit in it. But this is not how it should be. It should be a quite understandable tool for any trader once he or she has grasped the basics and has had some practice trading using Fibonacci levels along with other secondary indicators that will help you to improve the accuracy of the entry and exit point for every particular trade.

And that is really 90% of what you need to know to make money in the Forex Markets.

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Bob Perry is a freelance writer with experience in financial markets and investments. Lately he has become involved in affiliate marketing. Check his blog for more informative articles