Fibonacci Ratios in Forex Trading

By: Annie Williams
The Forex market is the largest financial market in the world. There are many different methods by which the movement of currencies can be predicted. Analyzing currency movement with Fibonacci ratios is one such method. The Fibonacci sequence was developed by Leonardo Fibonacci. He is famous for working out the Fibonacci sequence of numbers.

The
Fibonacci sequence of numbers is as follows – 1,1,2,3,5,8,13,21,34,55,89
The sequence is obtained by adding the 2 preceding numbers.

Golden Mean and Fibonacci Retracement Levels
In
Forex trading, the most important numbers when it comes to Fibonacci include:

• The Golden Mean or Fibonacci ratios are - 0.382, 0.5, 0.618
• The Fibonacci retracement levels are – 0.236, 0.382, 0.500, 0.618, 0.764

The Fibonacci ratios that are derived from the Fibonacci sequence help in determining the movement of markets in the FX market. It serves as an important technical indicator in the Forex market.

How do Fibonacci ratios work?
If a currency pair has attained a price of 1.5670 from 1.5282 and then there is a retracement. If the traders currently trading actively on this pair of currency believe that the pattern will follow a Fibonacci sequence, they will anticipate that the next move of the currency pair will reach “38% level of 1.5525” or a 50% followed by 62% level. So, this anticipation and expectation of the currency movement as per Fibonacci ratios will be able to predict movement of the currency pair and help the trader make a decision regarding their next position.

The sequence in which the numbers occur in Fibonacci series is the pattern in which the currencies move in the
Forex market. The Fibonacci series will indicate points when currencies will return to their original position after traversing a long distance.

How do Fibonacci numbers help in Forex trading?
Fibonacci ratio, “the ratio of Fibonacci numbers with each other” is used in technical analysis and helps to do the following in Forex trading:

• Identify patterns and trends in the Forex markets
• Anticipate resistance as well as support levels. Support and resistance levels help traders identify entry as well as exit points in the FX market.
• Defining stop loss orders
• Setting a position size

Other technical indicators that are used for predicting movement of currencies in the FX market include:

• Pivot point
• Elliot Wave theory
• Moving Averages
• Momentum
• Bollinger Bands
• Stochastics
• MACD or Moving Average Convergence/Divergence
• RSI or Relative Strength Index