Forex Strategy: What Is Fibonacci Trading?

Day traders use Fibonacci retracement lines to help them make decisions about when to enter or exit markets, as well as determine stop loss and take profit targets. This strategy is based on the Fibonacci Sequence, a series of numbers discovered by an Italian mathematician named Leonardo Fibonacci in the 13th century.

The sequence begins with two numbers, 0 and 1, and every subsequent number is the sum of the last two numbers in the sequence. These numbers can be used to create a series of ratios that are important in Forex trading. One of these ratios is the “Golden Ratio,” which is roughly 61.8 percent.

Along with the Golden Ratio, two other ratios, .382 and .236, are commonly used in Fibonacci Trading. These ratios are found by dividing certain numbers in the Fibonacci Sequence.

For successful use of the Fibonacci retracement lines, a trader first needs to do technical analysis on recent charts to find an uptrend or a downtrend. They then draw a line at the top and bottom of the trend, representing 0 and 100 percent. Next, the trader adds Fibonacci retracement lines at 23.6 percent, 38.2 percent, and 61.8 percent for support and resistance levels. If the trend is at the top, the lines start there, with 23.6 percent closest to the highest point. If it’s a downtrend, the Fibonacci lines start near the bottom, with 23.6 nearest to the lowest point.

These lines can serve as reference points to help a day trader make decisions about when to enter a market or exit it, as well as when to set stop loss and take profit targets.

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