Fibonacci retracements are a favorite of forex traders that use technical analysis to reveal support and resistance levels in the market. It is very generally utilized by most technical traders in their forex trading strategy.
Leonardo Fibonacci was the originator of a series of numbers that are utilized in the Fibonacci retracement tool. A retracement is achieved by picking two points, usually a high and low point in the price and dividing them by certain fibonacci ratios. The 23.6%, 38.2%, 50%, 61.8% and 100% ratios are used.
If plotted on a financial charts, the ratio lines will be drawn automatically. Areas of support and resistance seem to have a tendency of forming at these ratios. It is vague how or why market prices react to these ratios but history has shown us that they do. As such, fibonacci retracements are always referred to by technical traders before entering a trade.
This instrument is used in all major financial markets ranging from the forex market, stock market and the futures and commodities market. Fibonacci confluence is a strategy that was achieved by some traders looking to make fibonacci retracement more successful. Fibonacci confluence is a method that needs the plotting of two or more fibonacci retracements on the same instrument. Multiple retracements are plotted from the same starting point while they end at different areas of resistance.
Areas which are found to have more than one ratio line are considered areas with strong support or resistance. Traders mark these areas as a reminder during trading.
It is not recommended to use fibonacci retracements on their own. They are used with other forex indicators to enhance decision making. When used with a variety of tools and indicators, fibonacci retracements are often useful.
Read more for a guide on fibonacci retracement in addition to extra universally employed indicators at www.i-forex-trading.com.
