Wednesday, April 23, 2014

Forex Fibonacci Indicator Explained

March 17, 2010 by  
Filed under Fx Indicator


As most of you know that the forex market basically moves in waves and there will be time where the market extends and there will also be time where the market retraces.

One of the best tools that you can use to time this retracement and extension is the forex Fibonacci levels.

So What Exactly Is Fibonacci?

It is a number sequences that is named after Leonardo of Pisa and the Fibonacci number sequences goes like this

0, 1, 1, 2, 3, 5, 8, 13 and so on. (Add the first 2 numbers to get the next)

However in trading, we are not interested in the sequences, we are actually interested in the Fibonacci ratio that the sequences create.

These are the ratio that we use as a forex trader.

Below are the retracement ratios

- 0.236
- 0.382
- 0.500
- 0.618
- 0.764

Below are the extension ratios

- 1.272
- 1.382
- 1.500
- 1.618

So How Can You Use These Ratios In Trading?

The Fibonacci ratio is in fact used as a level of support and resistance. These are areas where you will SELL or BUY depending on what you see and where you are.

Although there are quite a number of ratios given above, the important ones are the 0.382, 0.500, and 0.618 as they are usually area of strong support when the price retraces down and area of strong resistance when the price retraces up.

Here Is How You Should Plot Your Fibonacci Levels In An Uptrend

Step 1: Using the tool provided by your platform, Pick a high point and a low point

Step 2: Select the levels that you want to display. (We will select 0.382, 0.500, 0.618, 1.272, 1.382, 1.500 and 1.618)

If you are in a downtrend, all you have to do is to switch the step 1 points.

Uptrend Fibonacci

Downtrend Fibonacci

In the case where you are in an uptrend, you will find that the retracement of your price will usually land on the 0.382, 0.500 or the 0.618 level as these are area of strong support and the price will then extend up to continue in its uptrend movement.

If you ever find the price moving below the 0.382 level, there is a high chance that the trend is reversing.

In the case where you are in a downtrend, the market will retrace upward and it will also find its resistance at 0.382, 0.500 and the 0.618 levels. Similar to the uptrend, if the market retraces above the 0.382 level, there is a high chance that the market is reversing.

Fibonacci Support and Resistance

In my next blog post, I will show you how to trade using Fibonacci Strategy and how you can make use of the 1.272, 1.382 and the 1.618 levels. In the meantime, you should try to plot the Fibonacci levels on your chart to see the power of it.

 

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Comments

5 Responses to “Forex Fibonacci Indicator Explained”
  1. Sid says:

    I learned a lot from your blogs and videos.

    Thanks a ton.

    Cheers, Sid

  2. sharon says:

    Hi kelvin, please how do I know where to place these numbers on the chart. Is there a particular line for each of these numbers 0.382,0.500 etc

    • Kelvin says:

      Hi Sharon

      Are you referring to the 0.382, 0.500 and 0.618 numbers?

      It should be done automatically with your trading tools on your platform.

  3. Boyxx says:

    Hi, this is my biggest problem :

    ———-
    Here Is How You Should Plot Your Fibonacci Levels In An Uptrend

    Step 1: Using the tool provided by your platform, Pick a high point and a low point
    ————-

    so Step 1 : it’s yesterday high point ? or week high ? there are too many high ponts, so how can i pick a high point ?

    and which time frame ?

    thanks so much

    • Kelvin says:

      Hi Boyxx

      The high point you should use are usually the most recent high. As for the time frame to use, it depends on your trading style. If you are trading off the 15 minutes chart, the high will be at that time frame and if you are trading off the hourly chart, the high will be from that time frame.

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