Applying Fibonacci numbers on Forex
Stable and profitable Forex trading requires a lot of knowledge, and, moreover, not only of indicators and strategies, which are very popular today, but also basic knowledge, i.e. of market theories and laws, on which all popular indicators and strategies are based. Any trader can find a successful forex strategy, which will work for a certain short period of time, but only those, who know the basic theories, can trade profitably for many years. There are several theories, and each one can be studied separately for a long time, but in this article we will discuss only one of them, Fibonacci numbers and their application at the Forex market.
Fibonacci numbers sequence
Fibonacci numbers are a numeric sequence, a series where each successive number is a sum of two preceding ones. The series is infinite, we are interested in its original values of 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, etc. The sequence invented by the Italian mathematician has found application in many spheres, from astronomy to art. It didn't pass by Forex as well. By observation, certain ratios of trend waves, impulse waves, corrections, and other values were derived. These ratios are often approximated to the values of Fibonacci numbers, due to which one can use them to predict the price movement with a certain accuracy. Fibonacci numbers have become the basis for a large number of trading instruments.
Fibonacci numbers in forex
The most popular instrument on the market is the Fibonacci levels. They are based on the fact that the length of a particular evaluated wave is equal to a hundred percent, and various Fibonacci numbers are percentage levels relative to the length of this wave. Thus, if built correctly, we get several potential correction levels and several "targets" to which the current trend is aiming. It will allow us to set Stop Loss and Take Profit levels and determine the possible limits of price movement.
Apart from Fibonacci levels there are other tools in forex, such as Fibonacci Fan, Fibonacci Extension, Fibonacci Arcs, Time Zones and others. It would take a long time to describe the application mechanisms of all of them.
If we talk about specific trading signals given by the tool, they can be similar to the signals of support and resistance levels. That is, when approaching the level, say, from the bottom, the price reversal is likely, you should open a sell deal with Stop Loss above the level. And vice versa, when approaching from above. In the case of a strong price movement in the direction of the breakout level, Stop Loss should be placed behind the broken level. The price moves from level to level, knowing this, and having levels, you can mark out the probable price movement. But we must not forget about the influence of other factors, for example, the same resistance and support levels, which do not always coincide with the Fibonacci levels. Using Fibonacci levels in combination with other tools increases the quality of forecasting.
The main advantage of Fibonacci levels is that they belong to those few instruments and indicators of technical analysis which do not follow the price, but give anticipatory signals allowing us to react on time. By trading only lagging instruments, getting a signal and waiting for its confirmation, we lose the most precious minutes when the price makes a major movement. Following the price and being unable to predict its movement is the most common reason of failures of traders.
Disadvantages of Fibonacci tools are also obvious. Their use as independent indicators gives too inaccurate and ambiguous signals. The peculiarity of the Forex market is that you can never predict the price movement with 100% confidence, especially if you rely only on the signals of proactive indicators. The cure for this may be the use of Fibonacci tools in combination with the indicator following the price, which signal will be confirming. This will help to avoid a lot of false signals.
Fibonacci numbers in Forex are just one of the basic theories. For successful trading and flexible trading strategies at least several of them should be used, as they all have disadvantages and the advantages of some compensate for the disadvantages of others. Among other things you should not forget about the fundamental analysis. No matter how full and proper technical analysis is, the influence of information on the currency market in the modern world is crucial, that is why you should follow all news and changes in the world economy in order to react to them in proper time.