Fibonacci Retracements are a popular trading tool used by many Forex traders to identify areas of support and resistance in the market. Fibonacci levels useful in defining levels in the market where pullbacks are likely to occur following a strong directional move. These levels are either used to trade any market pullback or instead as a level to position for the resumption of the original trend.

Fibonacci is named after Leonardo Fibonacci, a mathematician who lived in twelfth century Italy. He studied many ancient number sequences which had previously been observed in nature . These number sequences were repeatable. The number sequence that he identified was created by adding together the two preceding numbers of a sequence in order to create the next. What he also found was that by dividing any number in the sequence by the subsequent number, you would end up with a ratio of 61.8%. This is referred to as the Golden Number and is part of the Fibonacci sequence used in Forex trading.

Fibonacci Technical Analysis may seem complicated to a novice trader but is actually quite simple to graspFibonacci levels are commonly applied to Forex trading in two ways.

Fibonacci to identify levels or market retracements

The first use of retracement levels is to identify where a market may pull back to following a strong move. After identifying the moves high, the market pullbacks can be traded.

Fibonacci Retracements work across all chart time frames and for all types of traders. The retracements occur at specific levels of the preceding move. The most standard levels are 23.2%, 38.2%, 50% and 61.8%. Each of these set levels will provide either support or resistance to market moves. The 61.8% is given a special significance by Forex traders. If this level is breached on a retrace then it is assumed that the entire preceding move will be retraced.

Fibonacci levels are also used by traders as points to take profit or a level to locate a stop loss behind.

Identifying entry into the trend with Fibonacci
Identified retracement levels are also used as levels to position ahead for an entry into the original trend. In this case, the retracement levels are used to identify levels that the market may sell off to. This might simply be the result of profit taking or the market unwinding from oversold levels. By being aware of where the market is likely to pull back to, the trader is able to position themselves to rejoin the major trend.

You can easily calculate a Fibonacci Retracement level by the use of a Free Fibonacci calculator.Remember that as with all techincal analysis approaches, always seek further confirmation from other technical methods before relying on any one trading approach.

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