Fibonacci Method
The Italian mathematician Leonardo Fibonacci introduced a simple series of number in his publication Liber abaci that were later named the Fibonacci numbers in his honour. The series begins with 0 and 1. After that, use the simple rule:
Add the last two numbers to get the next.
0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, and so on.
If you measure the ratio of any number to the next higher number the result will be 0.618. This starts from 21, for example, 21/34=0.618 (when rounded to 3 decimal places).
If measuring the ratio between alternate numbers you would get 0.382. For example, 13/34 = 0.382.
A few examples of Fibonacci numbers are pine cones, sunflowers, pineapples, palm trees, spider webs, snail shells, DNA molecules and millions of other things in the universe.
When applied on Forex charts, Fibonacci Retracement Levels are used as support and resistance levels: 0.236, 0.382, 0.500, 0.618, 0.764. with 0.382, 0.500 and 0.618 being the most important to watch out for.
Fibonacci Extension Levels are used as targets for taking profit: 0.382, 0.500, 0.618, 1.000, 1.382, 1.500, 1.618.
The most useful for traders are 0.618, 1.000 and 1.618.
Fibonacci retracement and extension levels are important for experienced and novice Forex traders as they help to identify entry and exit points during the trade. The entry and exit points are critical to know so that you can maximise profit or minimise potential losses.
Once the exit point is known for each individual trade, emotion is removed from all trades. This makes it vital for novice traders to understand they need to separate emotion from trades and only ever trade with disposable money in the event of losses occuring. If the worst happens, you have minimised your potential losses while ensuring a decent profit if things go according to plan.
The golden rule here is to use Forex Charts as a way to calculate when you buy and when you sell. The Fibonacci method has proven to be effective in determining trade entry and exit points as there will always be some fallback when a currency is rising fast, or some climback when it is falling fast. Forex Tracer or other automated Forex trading systems can be used to carry out trades on your behalf after you have worked out your exit price.
