Fibonacci in Forex Trading Market
Fibonacci analysis is an exercise in identifying levels of support and resistance during both trend retracements and trend continuations based on a series of numbers and ratios derived from the Fibonacci sequence.
The Fibonacci sequence starts with 0, 1, and 1 and is calculated by adding the two most recent numbers in sequence to arrive at the next number in the sequence. For example, if you take the first two numbers in the sequence, you get 0 + 1 = 1.
If you then take the two most recent numbers in the sequence, you get 1 + 1 = 2. Repeating the process, you get 1 + 2 = 3, and so on. As you continue on with this process, the sequence begins to take shape and ends up looking like this: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55 and so on……
The two most important ratios found within the sequence from an investor’s point of view are 38.2 percent and 61.8 percent. These ratios also make very interesting appearances in the Forex market.
The first ratios we look at are those ratios investors utilize when forecasting retracement levels. The first ratio, 38.2 percent, is approximately the ratio of any number in the sequence divided by the number two places higher in the sequence.
For example, the sequence goes . . . 13, 21, 34, 55 . . . If you were to take 21 and divide it by the number two places higher than it in the sequence, 55, you would get the ratio 38.2 percent (21 ÷ 55 = 0.382, or 38.2%).
The second Support, Resistance, and Fibonacci 197 ratio, 61.8 percent, is approximately the ratio of any number in the sequence divided by the number directly following it in the sequence.
For example, looking once again at the sequence . . . 13, 21, 34, 55 . . . , if you were to take 34 and divide it by 55, you would get the ratio 61.8 percent (34 ÷ 55 = 0.618, or 61.8%).
In addition to the two ratios discussed above, which are the ratios investors use when they’re identifying support and resistance levels during retracements, most investors use three additional ratios—0 percent, 50 percent, and 100 percent.
These ratios have no real correlation with the Fibonacci sequence, but when used in conjunction with the two primary Fibonacci ratios, these ratios round out your retracement analysis tools. Two secondary Fibonacci ratios we discuss below also draw their values from the Fibonacci sequence.
These ratios are most effective in projecting trend continuations. The first ratio, 161.8 percent, is approximately the ratio of any number in the sequence divided by the number directly preceding it in the sequence. For example, looking at the sequence . . . 13, 21, 34, 55 . . . , if you were to take 55 and divide it by 34, you would get the ratio 161.8 percent (55 ÷ 34 = 1.618, or 161.8%).