In this article, we’ll get ourselves familiar to another term used in forex trading.
The Fibonnaci retracement is a technique being used by numerous professional brokers all over the world, and billions of dollars worth of trade are profited each year by using the said trading technique.
But first of all, what is Fibonacci Retracement? The Fibonacci Retracement is a term used in technical analysis to determine the support (price stops declining) and resistance (price stops rising) levels. It is the potential retracement of the original movement in the price of a financial asset. Horizontal lines are being used to point out the levels of support and resistance at the key Fibonacci levels before the price continues in its original direction.
It is named after the famous mathematician, Leonardo Fibonacci, who discovered the series of interconnected numbers in the 13th century.
The original sequence of Fibonacci numbers is 0, 1, 1, 2, 3,5, 8, 13, 21, 34, 55, 89, 144 and so on, wherein each number on the right side is the sum of the two preceding numbers on the left side.
The key Fibonacci ratios being used in technical analysis are 23.6%, 38.2% and 61.8%.
The 61.8% ratio, also called the “golden ratio”, is calculated by dividing one number to the number on its right side. It doesn’t matter which number you choose, the answer would always be close to 61.8%.
For example: 13 divided by 21 = 0.619, and 55 divided by 89 = 0.6179.
The 38.2% ratio is calculated by dividing a number to the number two places to its right. Likewise, regardless which number you choose, the answer would always be close to 38.2%.
For example: 55 divided by 144 = 0.3819, and 13 divided by 34 = 0.3823.
Lastly, the 23.6% ratio is calculated by dividing a number to the number three places to its right. Just like the first two ratios, no matter which number you choose, the result would always be close to 23.6%.
For example: 8 divided by 34 = 0.2352, and 21 divided by 89 = 0.2359.
The Fibonnaci retracement is being used by numerous professional brokers all over the world, and billions of dollars worth of trade are profited each year by using the said trading technique.
We’ll discuss more about Fibonacci trading in our next educational articles.
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