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Fibonacci Retracement is a very popular tool among technical traders and is based on the key numbers identified by Leonardo Fibonacci. However, Fibonacci's sequence of numbers is not as important as the mathematical relationships, expressed as ratios, between the numbers in the series. In technical analysis, Fibonacci retracement is created by taking two extreme points (usually a major peak and trough) on a stock chart and dividing the vertical distance by the key Fibonacci ratios of 23.6%, 38.2%, 50%, 61.8% and 100%. Once these levels are identified, horizontal lines are drawn and used to identify possible support and resistance levels. Before we can understand why these ratios were chosen, we need to have a better understanding of the Fibonacci number series.

The Fibonacci sequence of numbers is as follows: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, etc. Each term in this sequence is simply the sum of the two preceding terms and sequence continues infinitely. One of the remarkable characteristics of this numerical sequence is that each number is approximately 1.618 times greater than the preceding number. This common relationship between every number in the series is the foundation of the common ratios used in retracement studies.

The key Fibonacci ratio of 61.8% - also referred to as "the golden ratio" or "the golden mean" - is found by dividing one number in the series by the number that follows it. For example: 8/13 = 0.6153, and 55/89 = 0.6179.

The 38.2% ratio is found by dividing one number in the series by the number that is found two places to the right. For example: 55/144 = 0.3819.

The 23.6% ratio is found by dividing one number in the series by the number that is three places to the right. For example: 8/34 = 0.2352.

For reasons that are unclear, these ratios seem to play an important role in the stock market, just as they do in na

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What is fibonacci and how to use it in the world of FX?

Leonardo Fibonacci was a 13th century mathematician who noted that there are certain ratios that tend to occur repeatdly in nature . The common ones that he identified were 38.2%, 50%, and 61.8%. For example, the distance from your fingertips to your wrist is 38.2% of the distance from your fingertips to your elbow. There is overwhelming evidence of Fibonacci ratios operating throughout nature.

We can us these naturally reocurring ratios to help us anticipate stock market activity.Yes it's true!. What we can do is watch for retracements to these levels. For example if a stock has just completed a 10 point run, say from $90 to $100 and is now pulling back. We would expect the stock to retrace to $96.18 (38.2% retracement from $100) if it does not turn there we would next watch at $95 (50% retracement from $100) and the next level would be $93.82 (61.8% retracement from $100).

These are not always perfect, but surprisengly they work more than just often!! Many people have argued about why these work, but my opinion is that all the large institutions use them, so you might as well buy or sell at the same levels that they do and if these levels don't hold you can get out with a small loss. The key to trading is to take small defined risks (know when to get out if you're wrong) and have winning trades that are 2 or more times your average loss.

Fibonacci Levels will help you in :

showing you the most likely retracement levels for you to buy or sell from.

giving you very accurate price targets from the swing highs and lows (Fibonacci Extensions).

giving you very accurate price targets using the swing high, swing low, and first pullback area (DiNapoli Style Fibonacci Extensions).

giving you Fibonacci Time Extensions which give you very accurate time areas where the markets OFTEN make big moves.

This chart shows a strong up move, and a retracement to the first Fibonacci level of 38.2%. As you can see, this stock retraces to this level at the exact Fibonacci time extension level which is displayed on the bottom of the chart. When stocks retrace to Fibonacci levels at Fibonacci based times, there is a VERY high probability of the stock reversing and making new highs. In this example, the stock does go on to make new highs and stops within 1 penny of our Fibonacci Extension Price Target!

A key to using Fibonacci retracements is to gauge the strength of the original move. If it is a large thrusting move with small or NO pullbacks on the way up, odds are that the first Fibonacci level will hold. If it is a gradual move with many stops and starts, the first Fibonacci level is less accurate. In these cases you should wait to buy or sell short until after the level appears to hold. In the example above, because the rally up is so strong, and the pullback coincides with a Fibonacci time extension, there is a higher probability that this pullback level will hold. There are two ways to trade Fibonacci levels. You could take the trade with your stop immediately under this level and hope the level holds. Or you can wait for the level to hold and buy a breakout of the high of the previous 5 min bar for example. Here your stop loss would be farther away from the price you are filled, thus you are risking more, but the odds are higher that the trade will work
take a look at chart 2

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Ma summary Moving averages are one of the most famous tools and also the easisest tool used by many traders

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Forex Trading is not a Get-Rich-Quick Scheme!

Forex trading is a SKILL that takes TIME to learn.

Skilled traders can and do make money in this field. However, like any other occupation or career, success doesn’t just happen overnight.

Forex trading isn’t a piece of cake (as some people would like you to believe). Think about it, if it was, everyone trading would already be millionaires. The truth is that even expert traders with years of experience still encounter periodic losses.

Drill this in your head: there are NO shortcuts to Forex trading. It takes lots and lots of TIME to master.

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Winning in trading depends on using the right strategy and controlling all the moves.
Trading strategies are discussed in details at ForexGen Academy.

Why participate in the Forex Market?

There is no substitute for hard work and diligence. Practice trading on a DEMO ACCOUNT and pretend the virtual money is your own real money.

Do NOT open a live trading account until you are trading PROFITABLY on a demo account.

If you can't wait until you're profitable on a demo account, at least demo trade for 2 months. Hey, at least you were able to hold off losing all your money for two months right? If you can't hold out for 2 months, cut your hands off.

Concentrate on ONE major currency pair.

It gets far too complicated to keep tabs on more than one currency pair when you first start trading. Stick with one of the majors because they are the most liquid which makes their spreads cheap.

You can be a winner at currency trading, but as in all other aspects of life, it will take hard work, dedication, a little luck, a lot of common sense, and a whole lot of good judgment.

How do you figure out whether to freakin’ use oscillators, or trend following indicators, or both? After all, we know they don't always work in tandem.

This is probably the most challenging part about technical analysis. And why I call it the million dollar question.

We will provide the million dollar answer in a future lesson.

For now, just know that once you're able to identify the type of market you are trading in, you will then know which indicators will give accurate signals, and which ones are worthless at that time.

This is no piece of cake. But it's a skill you will slowly improve upon as your experience grows.