Using the Fibonacci chart for forex trading can be a very successful strategy. The Fibonacci chart is based on a mathematical progression discovered by Leonardo Fibonacci of Pisa, Italy, in the 13th century. He discovered that if you create a series of numbers by always adding the last two numbers together, i.e. 0, 1, 1, 2, 3, 5, 8, 13, 21, 34 etc, the ratios between the numbers follow certain interesting patterns which are often reflected in the physical world. For example if you take a leaf and calculate the ratio between its width and its length, you will often find one of Fibonacci’s ratios. Why this should be true in so many cases is one of the mysteries of the natural world.

But on a practical level, to get back to forex trading, these Fibonacci ratios are also often seen in oscillatory movements which includes price movements. The most important ratios for currency trading are 0.236, 0.382, 0.500 and 0.618. These can be used to predict certain price movements, particularly retracements or reversals within a trend.

You will know that whenever you have a strong trend with movement in one particular direction over a period of time, during that time there will be moments when the price reverses for a short retracement before continuing on its way in the direction of the trend. Retracement lines can therefore be drawn which can act as support and resistance levels.

In many cases the oscillation or fluctuation visible in a forex chart will reflect almost exactly one of the ratios discovered by Fibonacci. If you watch and measure these for a while using the Fibonacci chart principles you will be amazed how often this is true.

It is also possible to use extension lines using Fibonacci ratios to predict how far a movement will go before a reversal. If you can do this accurately it enables you to take the maximum profit from a trend. You can imagine how valuable that is.

For this reason there are many systems based around the Fibonacci chart method of technical analysis. The first thing to say about them is do not be too concerned about the math at first. It’s a fascinating subject and most systems will at least attempt to explain it, but you do not actually need to know why this works in the beginning. Just follow the system and you will find it is not so complicated.

In fact, because these ratios appear so often in nature and in our own lives, systems based on them can often seem intuitive. Take care not to be fooled into thinking the system is based around intuition, however. That is not true at all. You will still need to apply all the usual cautions and be consistent in your application of the system when you are using Fibonacci chart methods for financial trading.

Filed under: Forex Charts And Indicators

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