Fibonacci Retracement Levels: Nature or Nurture?
A trading indicator called the Fibonacci Retracement level has been gaining popularity in Forex trading as a means of deciding the best point to enter or a exit a trade. The main reason that this indicator has become so widely used is because it is thought to provide a valid indicator of support and resistance. However, more and more users are beginning to ask whether this is truly a valid indicator found in the natural world, or whether traders themselves are making it a self-fulfilling prophecy.
The Fibonacci Retracement level is named after Leonardo Fibonacci, an Italian mathematician who noticed that certain ratios seem to repeat themselves often in nature. Based on these observations, he came up with a numeric sequence to describe these ratios (23.6%, 38.2%, 50.0%, 61.8%, and 76.4%). An example of this ratio is the human elbow, which is located at a point that is 61.8% of the distance between the shoulder and hand. This is just one example; many others are found in nature.
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.
The issue that many are beginning to argue is whether Fibonacci levels are valid, inherent indicators found in the natural world, or instead a man-made phenomenon created by people's own trading behavior. For example, if traders expect that a price retrace to 61.8% will occur, a flood of purchasing activity may happen at that time that will drive the price up and in essence, artificially recreate the indicator through their own trading behaviors.
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: 389
Date: Mon, 29 Nov 2010
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