There are many of us who like to learn about different kinds of technical analysis tools that can be used to gain an advantage over the market. One of the most popular forms of forex charting is Fibonacci retracements.
Using Fibonacci retracement in British forex trading strategies.
This article will focus on the basics of Fibonacci retracements, how they can be used in trading.
What is Fibonacci?
Fibonacci was someone who lived back in the 13th century by the name of Leonardo Pisano. During his lifetime, he was mainly responsible for bringing the Hindu-Arabic number system (also known as the decimals) to Western Europe. When he first started doing so, many people thought it was witchcraft because they didn’t know about anything like this previously.
How is Fibonacci used in British forex trading?
The best way you should use Fibonacci retracements is by drawing lines on your charts where significant levels are. For instance, if you want to identify an area supporting resistance, you could draw a Fibonacci retracement level that connects crucial swing highs and lows over time. Once these areas are identified, traders can anticipate a bounce or a stall in price action when prices reach these retracement levels.
Point & figure charting is a common method for determining support and resistance levels with Fibonacci ratios is through point & figure charting. A trader may draw horizontal lines at 38%, 50% and 62% (or any other values they feel comfortable using) on a chart using closing prices. When the price touches or surpasses these levels, this shows possible support or resistance area. If a trader uses Fibonacci extensions, they may add a horizontal line at the 23.6% and 38.2% levels to look for potential areas of support or resistance.
In addition to these basic rates created from closing prices, traders can also use the Fibonacci retracement levels on their charts. The Fibonacci Retracements tool is found in most trading platforms and is often located under the indicators section of the trading platform’s charting tools.
A trader will enter in specific rates for each period they want to view (such as daily, weekly, hourly), and this will generate a line in the desired time frame across a chart in a specific colour. If a trader draws lines from the high of each price bar to the low of each price bar, where each line intersects with these rates generates Fibonacci levels on the chart. The early part of the retracement is typically weaker, while later areas are more substantial.
How can Fibonacci help you to spot potential areas of support and resistance?
When it comes to using Fibonacci retracements, the more times than price tests the same area again and again after significant levels are broken. This is without fail going to be an area that turns into solid support/resistance during future tests. This will even apply when market conditions change.
Why do we like using Fibonacci to trade British forex?
Many people like using Fibonacci because they believe it’s part of the secret sauce to forex trading. However, it’s just superstition and more of a placebo effect for some people rather than something you should rely on as your primary strategy.
How can Fibonacci retracement levels help you find new opportunities?
One thing you’ll often notice about Fibonacci retracements is that they provide excellent support/resistance areas, which are tested repeatedly over time. This means that if price breaks through these areas during a significant trend move, this adds credence to the idea that price levels will hold as new levels of support/resistance move forward.
The Final Word
Using Fibonacci retracements in forex trading is one of the quickest ways to see strong potential trades. There are several keys to finding proper Fibonacci levels that work for you and your strategy. Beginner traders are advised to use a reputable online broker from Saxo capital markets before starting their investment journey.