Fibonacci Key Areas Of Support And Resistance
Fibonacci retracement, extension and projection are important tools in the hands of any trader. Fibonacci ratios are used extensively in trading. Traders use these ratios in almost all markets. Fibonacci Sequence is obtained by adding the two proceeding numbers in the sequence to obtain the next number.
Now,you might ask what is the basis of this Fibonacci Retracement. The basis of this Fibonacci Retracement is the fact that the price action does not move in one direction forever. Whether the price action moves up from low to high or down from high to low, it stops at some point and tries to consolidate it's movement by making a retracement. Yes, the price tries to go back to from where it had come. This retracement can be 100% or less than that. Fibonacci Retracement gives you the possible levels of these retracements.
When the price action stops and tries to make a retracement, it is said to be resting or consolidating and this is known as Consolidation. Why the market tries to consolidate itself? Markets are just people buying and selling. When the prices make a movement too fast in one direction, this makes these buyers and sellers in the market jittery and they tend to stop buying or selling at some level in order to take stock of the market situation. This is the basis of this consolidation.
Since, the move started from the low to the high, the Fib Graphic Tool will assign the 100 percent level to the low point or the original level from where the move started.
This is done with the thinking that the price action will go all the way back to the level from where it had started. When it does reach the original level, it is 100 percent level price retracement.
Now, if the price action makes a move from the low to the high than the 100% retracement level will be the low point. In the same way, if the price action made a move from the high to the low, the 100% retracement level will be original high point. When you will connect these two points, the Fib Graphic Tool will draw the Fibonacci Retracement Levels automatically.
These Fibonacci Retracement levels will be horizontal lines that will apear at 0%, 23.6%, 38.2%, 50%, 61.8% and 100%. Now these are possible level upto which the price action may retrace itself in the future.
So, when the price action reaches these Fib lines, a trader can detect how the market behaves to these levels. If the Fib line is broken, it means that if the trader was looking to sell, this is the time to sell and if the Fib line is not broken, the trader who was looking to buy should take it as buy signal. Ofcourse, other indicators are used to confirm these buy or sell signals.
Article Source: FxTradingStock.com
About the Author
Mr. Ahmad Hassam has done Masters from Harvard University. Learn this powerful Fibonacci Retracement method FREE that pulls 500+ pips per trade. Get these Forex Scalping Cheatsheets plus the 10X Scalping System FREE.
by: Ahmad Hassam
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Word Count: 481
Date: Thu, 30 Sep 2010
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