Are Fibonacci Retracement Levels Valid Indicators for Exit and Entry Points?
There is a trading indicator called the Fibonacci Retracement level. This indicator is used by forex traders to help them determine entry and exit points. The reason as to why this indicator is so popular is because the retracement levels it produces help to indicate support and resistance. But many people question if this indicator truly comes from nature, or perhaps forex traders are validating it through their trading actions?
The emergence of the Fibonacci Retracement levels have been tracked to an Italian mathematician by the name of Leonardo Fibonacci. He discovered that certain proportions appear quite commonly in nature, and devised a series of numbers that represent these ratios. Specifically, these are 23.6%, 38.2%, 50.0%, 61.8%, and 76.4%. One example of this ratio in the natural world is that the elbow is located about 61.8% of the way between the hand and shoulder. Many other examples can be found in the natural world.
Traders have applied these ratios in their technical analysis of price charts. Regardless if the price is trending up or trending down, traders found that pullbacks usually occurred at Fibonacci levels. For example, a price in an uptrend may retrace 61.8% before continuing its uptrend. The ratios that form these retracement levels serve as a basis to define support and resistance.
So the question that has been bounced around is, do Fibonacci levels exist because they are really found in nature, or have forex traders created an indicator validated by self-fulfilling expectations? In the prior example above, if traders are expecting the price to retrace to 61.8%, then a significant amount of buy orders would be placed at that price level. If enough orders are placed, then it will push the price back up. So in this way, the traders' actions could be establishing the credibility of the retracement level.
Ultimately it doesn't matter whether or not retracement levels are some sort of natural phenomenon or are instead created by the expectations of Forex traders themselves. The key thing to remember is that no matter how they came about, Fibonacci Retracement levels are still a good way to determine support and resistance pullbacks. While this method does not work all of the time, there is no single indicator that does. It is still a valid indicator that can be used by Forex traders to make profitable trades.
Article Source: FxTradingStock.com
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Want to find out how Fibonacci retracement levels can enhance your trading, then visit Rudolf Boquiren's site on how to build the best forex trading system for your needs.
by: Rudolf Boquiren
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Word Count: 391
Date: Wed, 8 Dec 2010
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