The Fibonacci numbers are used frequently in hypothesizing which rates assets gravitate. In particular, there are four popular Fibonacci studies: arcs, fans, retractions and time series.
The use of Fibonacci numbers is spreading in the foreign exchange market (Forex).
The Fibonacci numbers were developed by Leonardo Fibonacci and are simply a series of numbers that when you add the previous numbers ending with the next number in sequence. Here’s an example:
1, 2, 3, 5, 8, 13, 21, 34, 55
When a market is moving swiftly in a given direction, may sometimes pull in as the participants take their profits. This phenomenon is usually known as retractions and create good opportunities to re-enter the market at attractive levels before moving to reactivate.
The retractions are usually of similar size and shrinkage of 50% and 61% in particular (Fibonacci ratios) have received considerable attention among investors Forex.
The prices are usually retracted or retrace a percentage of the previous move before reversing. These retractions Fibonacci usually occur in three levels – 38.2%, 50% and 61.8%. In fact, the level of 50% has nothing to do with Fibonacci, but traders use this level because of the tendency of prices to change after withdrawing half the previous move.
In the following example illustrates a very general level a 38% shrinkage in an uptrend:
When a movement begins to change, the 3 price levels are calculated (and drawn using horizontal lines) using bottom-up movements. These retracement levels are then interpreted as likely levels where counter movements stop. It is interesting to note that the Fibonacci ratios were also known by the Greeks and Egyptian mathematicians. The ratio was known as the Golden Mean (Golden Mean) and was applied in music and architecture. A Fibonacci spiral is a logarithmic spiral that tracks natural growth patterns.
After a price that makes a move upward (A), it can then go back a part of that movement (B), before moving again in the desired direction (C). Retractions are what you, as a trader of the oscillations, when you start you want to monitor for long or short positions.
Once the price starts to shrink (back), then you can represent these retracement levels on a graph to test for signs of change. You should not automatically accept the price just because it is a common retracement level! Wait and look for patterns of candles to develop in the area of 38.2%. If you see no sign of change, then the area could drop to 50%. Find a setback there.
The following are a perfect example retraction point “A” to point “B” (61.8%) and then continues its trend in the direction “C”
In the next example we find a retraction of a bear market from point “A” to point “B1” (at 50%) and then continues down but returns to touch up the point B2. Hence the importance of support and resistance levels. We can see that to confirm a double top at points B1 and B2 crossed with a Fibonacci retracement of 50% and candles reverse pattern to the downside, we have a position with very high probability of being profitable to continue downward to the point “C”.
You do not know when there will be a retraction or know if the price back down to a level of Fibonacci safely. You just mark those areas on the chart and wait for a signal to another indicator or standard candles to assume a long or short position.