Fibonacci Retracement-Is It The Holy Grail
Many traders use fibonacci retracement levels in making their entry and exit decisions for a trade. Traders use Fibonacci Retracement levels to help identify the price support and resistance.
What is more important is how you use Fibonacci Retracement levels in different trading situations.
The fibonacci sequence was discovered many centuries back by an Italian mathematician. Over the centuries, it has been found that this sequence has many applications in nature. Fibonacci sequence is obtained by adding the two numbers in the sequence to find the next higher number.
The first important Fibonacci Ratio is obtained by dividing any number in the sequence with next higher number. This number will always be the same and is 0.618. The second most important Fibonacci Ratio is obtaind by dividing any number in the sequence with a number that is two positions higher than that number. This ratio is also always the same and is 0.381. These ratio have been found to have important applications in nature. Traders also love to use these ratios in their trading. These ratios are used to describe the possible retracement and projection levels in the price action.
The Fibonacci Ratios that are used to predict future retracement levels in the price action are 0%, 38.1%, 50%, 61.8% and 100%. Now, whenever price action makes a move from the high to the low or from the low to the high, it has a tendency to retrace itself after the move has been completed. This is the basis of the Fibonacci Retracement. So when the price moves from low to high, when it reaches the high point, it will have a tendency to retrace itself to the low point.
So the Fibonacci retracement levels will be 0, 38.1%, 50%, 61.8% and 100%. Traders think that price action will tend to find support or comfort at these levels. It is another question whether it does or not. Most of the traders use the number 38.1% as entry point in the trending market.
We all know that markets are just people buying and selling. What the people believe, the markets believe too. In other words, people's emotions and sentiments have a lot to do with determining the behavior of the market. When people are bullish, markets are bullish and when the people are bearish, markets are bearish.
As majority of traders use these Fibonacci Retracement Levels in their buy or sell decision, the markets tend to show key support or resistance at these levels. Fibonacci Retracement is a leading indicator unlike most other technical indicators that are lagging in nature. This makes them a very powerful tool in the hands of an experienced trader.
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
Total views: 27
Word Count: 444
Date: Sun, 26 Sep 2010
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