Fibonacci Forex Trading - Application to the Forex Market

The Fibonacci number series is ubiquitous. It is everywhere, whether one is aware or not.

Not only was it prevalently found in older cultures (Greek, Egyptian, and Hebrew), in elements of life (DNA molecule and the human body), and even in recent studies of the entire universe, Fibonacci numerical relationships play a very significant yet subtle
role in market action and hence, trading.

Even more, Fibonacci Forex trading has actually become the platform of a majority of Forex trading systems and is used by numerous professional Forex brokers all
over the world.

Yet, it may well be asked why a relatively simple series of numbers would play such a strong role in the Forex market with traders quite often separated by culture and great distances.

The difficulty in perceiving the possibility of this at least in part comes from a human tendency to believe itself to be independent and somewhat separated from nature.

Certainly, when we are injured, sick, or close to death, the influence of nature in our lives
is quite obvious.

However, under 'normal conditions", our intelligence gives us a sense of being "above" the control of nature, especially in a collective sense and blinds us to elements of the truth.

The truth under discussion is that changes in market prices largely reflect human opinions,expectations, and valuations.

A series of studies, published in the 1980s by mathematical psychologist Vladimir Lefebvre, demonstrated that humans exhibit positive and negative evaluations of the opinions they hold with 61.8% positive and 38.2% negative.

If you recall, these two numbers (61.8%/ 0.618 and 38.2%/0.382) are important Fibonacci ratios. This as well as other related studies suggest that Fibonacci numbers are intrinsically rooted in a trader's psychology.

Furthermore, other research has shown that markets are perfectly patterned, explaining that human traders, being part of nature, create geometric like relationships in their behaviors, even if they are not aware of it.

Therefore, the real truth here is that Fibonacci ratios affect all traders, whether they consciously
apply the numbers or not in their trading !

This has a very important implication for the Forex Trader !!!

Since these ratios as well as other Fibonacci numerical relationships appear frequently enough in
the timing of highs and lows and price resistance points, adding Fibonacci evaluations to technical
analysis of the markets may help identify key turning points, and significantly improve trading results.

Forex traders can greatly benefit from such mathematical proportions due to the fact that the
currency price fluctuations observed in Forex charts, where prices are visibly changing in an oscillatory
pattern, are known to follow Fibonacci ratios very closely as indicators of resistance and support levels.

Additionally, it is important to understand that Fibonacci analysis is a LEADING indicator. This
means that such analysis will provide a direction where the market will advance to, not where
it has gone to date, as most other indicators yield. This can be a very real advantage.

What does this means in practical terms ? How does a trader actually apply Fibonacci Forex trading
in whatever plan he uses?

As can be seen on a typical Forex chart, the currency prices are constantly changing, following an oscillatory pattern with peaks and valleys. The limit of the peak is called resistance while the valley is known as support.

In order to find, say, the 0.328 ratio level in an example, the size of the drop (or rise) is measured over the time of interest. That value is then multiplied by 0.328 and then added to the total drop (or subtracted from the total rise). This defines the anticipated retracement level and provides good numerical probability of where the market will retrace to and find new support or resistance.

Once this level has been determined, the strategy can be planned which theoretically will allow a trader to yield a high probability profit.

Successful application of Fibonacci analysis has the potential to allow traders to earn an excellent
income. Two very well known traders who effectively used Fibonacci especially in the Stock Market are W. D. Gann and R. N. Elliott.

Gann made his fortune using methods which he developed for trading instruments based on relationships between price movement and his work was heavily influenced by applying Fibonacci in his analysis.

Elliot developed the so called Elliot Wave Theory where all major market moves are defined by a five-wave series, adding to the potential to identify the turns. The Classic Elliot Wave series consists of an initial wave up, a second wave down (typically retracing 61.8 % of the initial move up), then the third wave (the largest) up again, another retracement, and finally the fifth wave,which completes the cycle.

It is very likely for a new Forex trader to become initially overwhelmed by this kind of numerical
applications in their market analysis. Such traders if truly interested in applying Fibonacci numbers
in their trading plan, should be encouraged to learn the basics well first and practice as much as needed
before actually risking any of their capital.

Since this discussion has hopefully demonstrated the importance (and strong influence) of Fibonacci ratios on the Forex market, it seems quite logical than to achieve the ultimate success as a trader, it is essential to understand and effectively apply Fibonacci Forex trading in the trader's plan.

To totally ignore Fibonacci analysis in trading the Forex market would be like walking into traffic blindfolded.

The cars may not be seen, but they could kill nonetheless.

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