Fibonacci Method

The Fibonacci method is an often overlooked Forex analysis method. If you are an online currency trader looking to maximize your profits next time you use your FX broker, then the Fibonacci method is definitely worth a look.

The Fibonacci method relies on ‘Fibonacci Retracements’ – these are probability points that indicate where a currency pair will bounce back to after a big move, and afterwards continue in the original direction.

The Fibonacci numbers

The Fibonacci method relies on a premise similar to the Newtonian laws of motion – “For every action there is an equal and opposite reaction.”

The Fibonacci method also holds that the opposite reaction is usually less than the original large move.

Fibonacci is well known outside of currency trading circles – he was a mathematician and came up with the Fibonacci numbers and ratios that are found in many aspects of nature. The Fibonacci numbers can be found by adding together the previous numbers – so 0 + 1 = 1, 1 + 1 = 2, 1 + 2 = 3, 2 +3 = 5, 3 + 5 = 8 and so on. The numbers increase rapidly as you follow the sequence.

If you examine patterns in nature (for example spirals on shells, or the seeds of a sunflower), you will find that they often contain the Fibonacci sequence.

Fibonacci ratios

are the ratios found by dividing one number in the sequence by the next, and it is these ratios that are used to track retracements in the FX market.

The Fibonacci retracement levels are 0.382, 0.500, and .0618. Thse are used to track support and resistance levels. The Fibonacci Extension Levels are 0.618, 1.000, 1.618 – these are used as profit making levels. You can plot these levels on your chart at your online FX broker, and place buy orders at 0.500 and 0.618 on the retracement levels and sell orders at the appropriate Extension levels.

Fibonacci levels

are not guaranteed to be accurate, but they are something of a self-fulfilling prophecy – many traders use the Fibonacci method as a basis for their online currency trading, and because of this they buy and sell at those points – the market is dictated by the actions of the traders, so the traders encourage the market to move in the appropriate direction.

It’s likely that your online FX broker’s trading platform has a Fibonacci option on the charting tool. Next time you’re trading FX online, why not give it a try?