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Fibonacci Trading in Forex

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Fibonacci Trading in Forex

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babypips

Elementary Fibonacci

Fibonacci Trading

We will be using Fibonacci ratios a lot in our trading so


Partner Center
you better learn it and love it like your mother’s home Find a Broker
cooking.

Fibonacci is a huge subject and there are many different Fibonacci


studies with weird-sounding names but we’re going to stick to two:
retracement and extension.

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Let us first start by introducing you to the Fib man himself…Leonardo
Fibonacci.

No, Leonardo Fibonacci isn’t some famous


chef. Actually, he was a famous Italian
mathematician, also known as a super-duper
uber ultra geek.

He had an “Aha!” moment when he


discovered a simple series of numbers that
created ratios describing the natural proportions
of things in the universe.

The ratios arise from the following number series: 0, 1, 1, 2, 3, 5, 8, 13, 21,
34, 55, 89, 144…

This series of numbers is derived by starting with 0 followed by 1 and


then adding 0 + 1 to get 1, the third number.

Then, adding the second and third numbers (1 + 1) to get 2, the fourth
number, and so on.

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After the first few numbers in the sequence, if you measure the ratio of
any number to the succeeding higher number, you get .618.

For example, 34 divided by 55 equals .618.

If you measure the ratio between alternate numbers you get .382.

For example, 34 divided by 89 = 0.382 .

You have now just experienced the Fibonacci Sequence!

Fibonacci Sequence

A Fibonacci sequence is formed by taking 2 numbers, any 2 numbers,


and adding them together to form a third number.
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Then the second and third numbers are added again to form the fourth
number.

And you can continue this until it’s not fun anymore.

The ratio of the last number over the second-to-the-last number is


approximately equal to 1.618.

This ratio can be found in many natural objects, so this ratio is called
the golden ratio.

It appears many times in geometry, art, architecture, and even on Sonic


the Hedgehog.

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The golden ratio is actually an irrational number, like pi, and is often
denoted by the Greek letter, phi (φ).

Okay, that’s enough mumbo jumbo.

With all those numbers, you could put an elephant to sleep. We’ll just
cut to the chase; these are the ratios you HAVE to know:

Fibonacci Retracement Levels

0.236, 0.382, 0.618, 0.764

Fibonacci Extension Levels

0, 0.382, 0.618, 1.000, 1.382, 1.618

You won’t really need to know how to calculate all of this. Your charting
software will do all the work for you.

However, it’s always good to be familiar with the basic theory behind
the indicator so you’ll have the knowledge to impress your date.

Fibonacci retracement levels work on the theory that after a big price
moves in one direction, the price will retrace or return partway back to a
previous price level before resuming in the original direction.
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Traders use the Fibonacci retracement levels as potential support and
resistance areas.

Since so many traders watch these same levels and place buy and sell
orders on them to enter trades or place stops, the support and resistance
levels tend to become a self-fulfilling prophecy.

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Traders use the Fibonacci extension levels as profit-taking levels.

Again, since so many traders are watching these levels to place buy and
sell orders to take profits, this tool tends to work more often than not due
to self-fulfilling expectations.

Most charting software includes both Fibonacci retracement levels and


extension level tools.

In order to apply Fibonacci levels to your charts, you’ll need to identify


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Swing High and Swing Low points.
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A Swing High is a candlestick with at least two lower highs on both the
left and right of itself.

A Swing Low is a candlestick with at least two higher lows on both the
left and right of itself.

You got all that? Don’t worry, we’ll explain retracements, extensions,
and most importantly, how to grab some pips using the Fibonacci tool in
the following lessons.

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How to Use Fibonacci Retracements

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