Fibonacci Analysis and the Forex Markets

Fibonacci analysis is a technique that is often used to analyze the Forex markets. This technique can be used in a variety of different ways when trading in the market. Here are the basics of Fibonacci analysis and how it can be used in analyzing the Forex market.

What Is Fibonacci?

Fibonacci analysis is a technique that stems from the series of mathematician Leonardo Fibonacci. He first came up with the ideas in this theory back in the 13th century. His Fibonacci sequence is very famous and is the basis for all of the theories surrounding this method. With the Fibonacci sequence, each number is the sum of the previous two numbers. For example, the sequence goes 0, 1, 1, 2, 3, 5, 8, 13 to start out with. He also discovered that when you divide a number by the previous number in the sequence, you would come up with 1.618 or close to it. If you went the other way and divided a number by the number that followed it, you would come up with 61.8 percent. This is known as the Golden Ratio. If you take one number and divide it by the number that is found two places to the right, you will come up with 38.2 percent. You will also come up with 23.6 percent if you take the number and divide it by the number that is three places to the right. These percentages are commonly used when analyzing the Forex market.

Support and Resistance

These percentages are most frequently used in the area of creating support and resistance lines on a Forex chart. This is done by looking at a recent high and low point of the market. That distance represents 100 percent of the market for this analysis. You will then place lines across the chart at each of the Fibonacci percentages. For example, you would place one at 23.6 percent, one at 38.2 percent, and then one at 61.8 percent of the distance. 

Once you have placed these lines, you will use them to help you with your trading decisions. For example, whenever the price in the market is moving, you might close out a portion of your trade once it hits one of the lines. Typically, with support and resistance lines, the market will move up to them and then back down again. It takes a large market movement for the price to break through one of these support and resistance lines. Therefore, whenever the price breaks through the line, traders will then place another trade that will stay in place until it gets to the next line. 

Stop Loss

Many traders will also use Fibonacci percentages when determining where to place their stop loss. Since they feel confident that the market is not going to go much below one of these lines, they can place a stop loss just below the closest line. This will allow them to get as many pips out of the market as possible. 

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