Fibonacci retracements, or simply fibo on chart forex, are a technical analysis tool used to identify potential levels of support and resistance in a trading chart. This tool is based on the Fibonacci sequence, a mathematical sequence that occurs naturally in many aspects of life, including the growth patterns of plants and the distribution of galaxies in the universe.
In forex trading, Fibonacci retracements are used to determine potential price levels that a currency pair might retrace to after making a significant move. Traders use these levels to identify potential entry and exit points for their trades, as well as to set stop loss and take profit orders.
To understand how Fibonacci retracements work, it’s important to first understand the Fibonacci sequence. The sequence is a series of numbers in which each number is the sum of the two preceding numbers. The sequence starts with 0 and 1, and goes on indefinitely. The first few numbers of the sequence are:
0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987, 1597, 2584, 4181, 6765, 10946, 17711, 28657, 46368, 75025, 121393, 196418, 317811, 514229, 832040, 1346269, 2178309, 3524578, 5702887, 9227465, 14930352, 24157817, 39088169, 63245986, 102334155, 165580141, 267914296, 433494437, 701408733, 1134903170, 1836311903, 2971215073, 4807526976, 7778742049, 12586269025, and so on.
The important thing to note about the Fibonacci sequence is that the ratio of any two adjacent numbers is approximately 1.618. This ratio is known as the golden ratio, and it appears throughout nature and in many man-made structures, from the proportions of the human body to the design of the Parthenon.
In forex trading, Fibonacci retracements are calculated by taking the high and low prices of a currency pair over a certain period of time and dividing the vertical distance between them by the key Fibonacci ratios of 23.6%, 38.2%, 50%, 61.8%, and 100%. These ratios are derived from the Fibonacci sequence and represent levels where a currency pair might retrace to after making a move.
For example, if a currency pair has a high of 1.5000 and a low of 1.4000, the vertical distance between them is 1000 pips. To calculate the Fibonacci retracement levels, you would multiply this distance by each of the key Fibonacci ratios:
– 23.6% retracement = 1000 x 0.236 = 236 pips
– 38.2% retracement = 1000 x 0.382 = 382 pips
– 50% retracement = 1000 x 0.5 = 500 pips
– 61.8% retracement = 1000 x 0.618 = 618 pips
– 100% retracement = 1000 pips
These levels would then be plotted on the trading chart, typically using horizontal lines. Traders would then watch for potential price action at these levels, such as a bounce off a retracement level or a breakout through a level.
Fibonacci retracements are not foolproof, and they should not be relied on exclusively for trading decisions. They are just one tool in a trader’s arsenal, and should be used in conjunction with other technical analysis tools and fundamental analysis.
In conclusion, Fibonacci retracements, or fibo on chart forex, are a technical analysis tool used to identify potential levels of support and resistance in a trading chart. They are based on the Fibonacci sequence, a mathematical sequence that occurs naturally in many aspects of life. Traders use Fibonacci retracements to identify potential entry and exit points for their trades, as well as to set stop loss and take profit orders. However, they should be used in conjunction with other technical analysis tools and fundamental analysis, and should not be relied on exclusively for trading decisions.
