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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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