Fibonacci retracement is a technical analysis tool that traders use to identify potential levels of support and resistance in the forex market. It is based on the Fibonacci sequence, which is a sequence of numbers in which each number is the sum of the two preceding numbers. In forex trading, the Fibonacci retracement levels are plotted using the high and low points of a price chart to identify potential levels of support and resistance.
To plot Fibonacci in forex, you need to follow these steps:
Step 1: Identify the Trend
The first step in plotting Fibonacci in forex is to identify the trend. The trend can be either uptrend or downtrend. In an uptrend, the price of the currency pair is moving higher and making higher highs and higher lows. In a downtrend, the price is moving lower and making lower highs and lower lows.
Step 2: Identify the Swing Highs and Lows
Once you have identified the trend, the next step is to identify the swing highs and lows. Swing highs are the peaks in the price chart, while swing lows are the valleys in the chart. To do this, you need to look for areas where the price has reversed direction.
Step 3: Calculate the Fibonacci Levels
Once you have identified the swing highs and lows, you can calculate the Fibonacci levels. The Fibonacci levels are 23.6%, 38.2%, 50%, 61.8%, and 100%. These levels are derived from the Fibonacci sequence and are used to identify potential levels of support and resistance.
Step 4: Plot the Fibonacci Levels
After calculating the Fibonacci levels, you need to plot them on the price chart. To do this, you need to draw a horizontal line at each Fibonacci level. You can use the Fibonacci tool on your trading platform to do this.
Step 5: Interpret the Results
Once you have plotted the Fibonacci levels, you can interpret the results. The 23.6% and 38.2% levels are considered minor levels of support and resistance, while the 50% level is considered a major level. The 61.8% level is a strong level of support and resistance, while the 100% level represents the original price level.
In conclusion, Fibonacci retracement is a powerful tool that traders use to identify potential levels of support and resistance in the forex market. By following the steps outlined above, you can plot Fibonacci retracement levels on your price chart and use them to make more informed trading decisions. Remember to always use other technical analysis tools and risk management strategies to ensure that you are managing your risk effectively.