Online Currency Trading with Fibonacci
The importance of this sequence and the relevant ratio is that it can be applied to almost everything in nature, from atoms to the structure of celestial bodies. It seems that nature uses this ratio to maintain balance and it appears that the financial markets mold themselves according to the same ratio, namely 1.618 or its inverse 0.618.
There are a number of Fibonacci studies used in online currency trading, including retracements, extensions, arcs and fans. However, the basic studies every trader needs to understand are retracements and extensions.
When applied to Fibonacci retracements and extensions, the ratio is converted into a series of percentages, namely the base levels 38.2%, 50%, 61.8% and multiples such as 23.6% and 161.8%. The mathematics behind the deduction of these levels is unimportant because any charting software will calculate these levels for you automatically.
Online Currency Trading: Fibonacci Retracements
In online currency trading, Fibonacci retracements are used to plot support and resistance levels. These levels are so effective because most traders employ Fibonacci levels to a certain degree and therefore trade when price hits these levels, thus, you basically have a self fulfilling prophecy. Fibonacci retracements have five levels, with lines drawn at 0, which represents the low, 0.382, 0.500, 0.681 and 1, which is the high.
Plotting Fibonacci retracements is quite simple on electronic platforms since all you have to do is locate the high and low of the time frame you are trading and, in an uptrend, click on the low and drag the cursor to the high or vice versa for a downtrend. So, if you are trading on a daily chart, you would identify the high and the low of the day and plot your retracements from the low to the high. You will then see as price uses the intermediary levels as support and, eventually, resistance since that is where traders will be buying and selling.
Online Currency Trading: Fibonacci Extensions
While finding a valid entry point into the market with Fibonacci retracements is critical to profitable online currency trading, identifying the exit point or the target is just as important. This is because many traders lose their profits simply because they stay in the market too long and others don’t take as much profit as they can because they don’t wait long enough. This is where Fibonacci extensions come in.
Fibonacci extensions help plot the levels where traders should take profit. Again, because most traders follow the same levels, it becomes a self fulfilling prophecy as everyone sets their take profit orders at or around those levels.
Plotting Fibonacci extensions is similar to retracements except that you will need a third point. Therefore, considering that the market is in an uptrend and you are trading the hourly chart, you would plot your extensions as follows. First, click on the lowest low – also known as swing low – of the previous hour, then on the highest high – or the swing high – and subsequently on the swing low of the current hour. This will generate a series of take profit targets based on the Fibonacci levels.
What is interesting is that you will find price will correct and rally between these levels as it continues on the uptrend, providing many trading opportunities. Thus, as you can see, Fibonacci studies are a critical addition to your toolbox if you want to become profitable in online currency trading.
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