Fibonacci retracement level is a popular forex trading technical analysis tool used by traders to find entry points. You can make use of retracement levels to calculate where the market may bounce back after a preceding movement. The market usually resumes the original direction after the retracement. Before you start using Fibonacci retracement level for technical analysis it is important that you gain an understanding of what the Fibonacci sequence is so that you can make use of it in an effective manner.
The Fibonacci numbers are calculated by adding the two preceding numbers in a sequence. For example 1+1 = 2, 2+1 = 3, 3+2 = 5 and so forth so that you are able to get a sequence of numbers. The retracement ratios can be derived from the numerical sequence and when you divide any number in the sequence of the following number then the answer is 61.8. The popular retracement levels are 61.8, 50 and 38.2.
Using Fibonacci retracement levels in forex trading
When trading forex you can make use of the Fibonacci retracement level to identify the entry and exit of market. The high and low of the movement are represented by two points. You can make use of candlestick patterns and other technical indicators to confirm the end of a move.
It is at the defined points of the move that the retracement levels occur. After you have calculated the levels, you may be able to plot them on the charts. This can enable you to find the entry and exit levels in the foreign exchange market. When you use the Fibonacci retracement level you may be able to find the support and resistance levels. This can enable you set stop loss orders and book profits.
The top and bottom of the previous trend is used by traders to determine the Fibonacci numbers in the chart. If the previous trend has been a downtrend, you can draw the retracement levels from the top to the bottom and extend the lines in such a way that they cover the next trend.
You can make use of other technical analysis tools like charts to confirm the direction of the trend. This can enable you to place a trade in the direction of the trend and make profits. You should avoid placing a trade against a trend as it can result in losses.
Learning Fibonacci retracement levels for forex trading
You can make use of the many online and offline resources to learn Fibonacci retracement levels and apply them for technical analysis. Many online training programmes are available that can help you learn the concepts of these retracement levels. You can make use of this knowledge to know when to enter and exit the market.
You need to understand that timing is crucial for success in the forex market and when you know the best time to enter and exit the market you may be able to earn consistent profits. You may also be able to minimise the risk of trading easily.
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