golden ratio – Forex Academy

Fibonacci trading is one of the most prolific trading methods, which is widely used by Forex traders. Retracement length, Fibo levels as well as reversal candle are three factors that Fibonacci traders need to pay attention to. In today’s article, we are going to demonstrate an example of a chart, which makes an excellent bearish move after having a retracement. The length of retracement, the most significant Fibo level, and the reversal signal all play their part in this example. Thus, fasten your seat belt and read through.

The chart shows that it makes a strong bearish move and makes a breakout at long-held support. The price heads towards the South, searching for its support. The sellers are to wait for the price to have a retracement.

The price starts having retracement. It produces a bullish inside bar followed by another bullish candle. The sellers are to wait for the price to find its resistance and produce a bearish reversal candle. However, the Fibonacci traders are to wait for the price to produce a bearish reversal candle at a very particular level, which is the 61.8 level.

The chart produces a bearish engulfing candle closing well below the last bullish candle. The Fibonacci traders must draw the Fibonacci retracement levels to find out which level produces this reversal candle. If this is the level of 61.8, the Fibo sellers are going to go short in the pair.

The highest high is the level of 0.00, and the lowest low is the level of 100.0. The price has a retracement and produces a bearish engulfing candle right at Fibo level 61.8. Usually, when the level of 61.8 works as support/resistance, it drives the price towards the level of 161.8. This means the price may head towards the South and hit the level of 161.8 next. Let us proceed to the next chart and see what the price does here.

The price hits 161.8 level. It makes an upward correction on its way. However, it reaches the level at last. The last candle shows that it breaches the level of 161.8. The price may head towards the South further.

The level of 61.8 is called the Golden ratio. It is a super significant level as far as Fibonacci Retracement is concerned. The buyers in a buying market and the sellers in a selling market wait for the price to produce a reversal candle/signal candle to go long/short in a pair. Yes, there some equations for the traders to know and obey to be able to trade with Fibonacci retracement. Once they learn them well, Fibonacci trading can make them a handful.

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.