Financial traders rely a lot on a tool called Fibonacci Retracement. This shows the percentage of retracement that the price makes after making a strong bullish/bearish move. The percentage of retracement is very significant to the traders. There are some particular levels, where the price reacts heavily and creates a new trend. Thus, financial traders use Fibonacci Retracement tool to measure retracement length and find the potential whether it is going to create a new trend or not. The Forex traders love using the Fibonacci Retracement tool as well. Once we know how to draw it on the chart accordingly, we find out that the currency pairs on almost all the timeframes obey the Fibonacci retracement ratio.
Leonardo Fibonacci, an Italian mathematician, identified a series of numbers such as 0, 1, 1, 2, 3, 5, 8. 13, 21, 34, 55, etc. Each number is the sum of the preceding two numbers. These numbers produce some significant ratios, such as 23.6. 38.2, 50, 61.8. 78.6, 100, 123.6, 138.2, 161.8. These ratios and the Fibonacci sequence are found in nature as well. Thus, people love using the sequence ratios in their design and plan. At the end of the day, people run financial markets. They buy or sell at certain levels. Since Fibonacci ratios are much related to our nature and life, traders love using these ratios to help decide where to buy and where to sell.
As far as Fibonacci ratios are concerned, the 61.8 is considered as the golden ratio. It is found in flower petals, seed heads, pinecones, fruits and vegetables, tree branches, shells, spiral galaxies, hurricanes, fingers, animal bodies, reproductive dynamics, animal fight patterns, DNA molecule, etc.
In the financial/Forex market, the ratios are used by using a tool called Fibonacci Retracement. There are other Fibonacci tools, but this one may be the trader’s most favorite.
In a buying market, a trader draws his Fibonacci retracement levels from the lowest low to highest high.
The level of 00.00 is the lowest low, and the 100.00 is the highest high of a bullish wave. Traders are to wait for the price to make a bearish retracement. All these levels are significant, and the price reacts to these levels. However, the buyers pay more attention when the price is around 61.8 level to go long in a pair.
In a bearish market, it is just the opposite. Let us have a look at how it looks like.
Fibonacci Retracement levels help traders spout out the trend’s initiating point. Thus, it becomes easy for the traders to take entry with excellent risk-reward. In our forthcoming articles, we are going to demonstrate charts on different pairs, time frames to find out how the price reacts to different Fibonacci levels. Stay tuned.