Leonardo Fibonacci da Pisa was a famous 13th century mathematician. He once was given a problem – he needed to figure out the number of rabbit pairs present if each month every mature pair brought forth a new pair and initially only one pair existed. The solution came to be known as the Fibonacci series:
0, 1, 1, 2, 3, 5, 8, 13 and so on.
The important observation made from the series was the presence of the Golden Ratio. Here the ratio of any number to its next higher number is 0.618 (approx), and its last smaller number is 1.618 (approx).
The Golden Ratio is special because it is present everywhere in the world. For example, leaves, flowers, and even the human anatomy contain this ratio. Therefore, the same Golden Ratio can be applied to Forex Trade since it applies to human concepts.
The Concept of Fibonacci Trading
Fibonacci Retracement is the technique through which the trader can calculate the instances of entering and leaving the market to maximize his profits—retracing means that the market will, at some point, have a momentary resistance before moving ahead in the old direction. Retracement is calculated with the use of high and low values of the previous day. The values at 38.2% and 61.8% retracement are considered when the market is most stable and possible predictions. Other key Fibonacci ratios are 23.6%, 50%, 78.6% and 100%.
Benefits of Applying Fibonacci in Forex
As the market takes on momentary stability at Fibonacci levels, a trader can withdraw if he experiences a loss (stop loss). On the other hand, he can enter the market if profits are witnessed since these profits are likely to continue till the next Fibonacci level is reached.
Almost all automation tools apply the Fibonacci parameters in their calculations. But Fibonacci should not be the only parameter deciding trade decisions. The market will show resistance at Fibonacci levels, and support cannot be guaranteed.