Fibonacci Analysis: How to use the Fibonacci Golden Ratio
The modern forex traders use Fibonacci as an essential tool for their analysis. They made efficient trading strategies to make consistent profits with Fibonacci ratios. It is developed by a famous mathematician named Leonardo Fibonacci who discovered the proportion of things in nature could be expressed using the numerical ratios. In this article, you will learn the Fibonacci analysis, calculations, and how it is used in forex trading.
How the Fibonacci Sequence works
Fibonacci ratio calculations are based on a series of numbers that begin with 1, followed by 2, and then summing the two numbers in order to get 3, which will be the next number in the series. After completing this process you will get a sequence like 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, etc. keep in mind, if you can solve this problem without using any calculator or assistant then it is the clear indication of your potential to become an analyst in forex trading.
Why we use Fibonacci ratios?
The Fibonacci ratios are used to calculate the retracements in price action. These ratios are very important to understand the resistance and support levels. Resistance indicates the price value can’t climb higher than the ratio level and signaling the downtrend. In case of an uptrend, you observe the rise in the price level that often leads to a support level.
Fibonacci Golden Ratio
Actually the Fibonacci golden ratio is a number that is equal to approximately 1.618. This number is also known as “phi” and expressed using the phi symbol derived from the Greek alphabet.
Divide the each number from Fibonacci sequence by the previous number you will receive this sequence:
( 1/1=1, 2/1=2, 3/2=1.5, 8/5=1.6, 13/8=1.625, 21/13=1.615, 34/21=1.619, 55/34=1.6176, 89/55=1.6181, 144/89=1.6179, 233/144 = 1.6180 )
1, 2, 1.5, 1.666, 1.6, 1.625, 1.615, 1.619, 1.6176, 1.6181, 1.6179, 1.6180,
Observe the calculation results, the numbers are oscillating around and getting closer and closer to Fibonacci golden ratio: the value of phi, 1.618.
Every number is approximately 0.618 greater than the previous number and the ratio between two alternate numbers in the series will give you a value of 0.382. These ratios are most commonly used by the forex traders.
- The key Fibonacci ratio of 61.8% is considered by finding the ratio of Fibonacci numbers in a series. For example, 34 divided by the 55 equals 0.6181 and 89 divided by 144 equals to 0.6180.
- The 38.2% ratio will be found by dividing a number available in the Fibonacci series by the number that is two places to the right. For example, 34 divided by the 89 equals to 0.3820.
- The 23.6% ratio is found when you divide a Fibonacci number with a number that is three places to the right. For example, when you divide 8 by 34 and get a value of 0.2352.
When a trader considers the price movements in a downtrend he/she will draw a line from the top of the price action to the bottom. The application software will draw Fibonacci retracement levels at 38.2%, 61.8%, and 50% level. These levels indicate the prediction about the price movements, either price level will increase or not. You can easily find out the value of a decline in the original price.
Many forex traders claim that it is difficult to make trades using the Fibonacci levels because of its difficulty; it is not always like that. If you have a good understanding of the forex market, Fibonacci retracement levels can help you to make accurate entry and exit points. Traders can achieve better results using Fibonacci analysis along with other secondary indicators such as moving averages, trend lines, candlestick patterns, and many others. Understand different technical indicators like RSI (Relative Strength Index) to make your trading efficient.