There are so many approaches to trading forex especially in the technical analysis field, that many times the newbie to forex trading will be dumbstruck with the various trading techniques and strategies. From the very simple but effective price trading action method to the sophisticated methods of neural network price projections and the complex methods of astrology and moon readings, forex traders, whether newbies or veteran traders can choose from a vast arsenal of trading tools to assist them in trading profitably.
One simple way to trade is to use fibonacci price levels and retracements.
As the price of a trading instrument increases, it will move from a low point A to a high point B, where B forms a temporary top. At point B, prices will then fall off and retrace. Statistics have shown that prices will want to fall off to fibonacci levels of 25%, 38.2%, 50% or 61.8% where it can get support to stage a rebound. The reverse is true when prices fall from a point A to a point B. Simple as it sounds, these observations can be used accurately to trade the forex, and has evolved into what we call fibonacci trading, some calling it “quick fib” trading.
The difference between trading forex and other capital instruments such as futures and commodities and stocks and shares becomes apparent when we use this method of trading. Firstly, when we trade forex, we do not have the opportunity to know the quantum of volume being traded at that instant, and so all we can do in forex analysis is to decipher the price movements. This makes the fibonacci trading method a price action trading method. In contrast, when we trade stocks and shares or commodities, we correlate trading volume to price outbreaks. When we have a price outbreak, and that is accompanied by heavy volume, we attach a higher level of confidence that the outbreak is genuine.
But in the absence of volume figures in forex trading, how then can we gain a high level of confidence on the price outbreak at any given time? Throughout the span of the rich knowledge of trading gained by veteran and experienced traders in the forex market, there has evolved methodologies and strategies that can allow the trader to have a high level of confidence that their trade is moving in the projected direction. The application of the legendary trader WD Gann price movements in eighths, for example, has led to the use of mini price levels and fibonacci levels to confirm price movements. Others have used projected price levels which are computed on a daily basis, so that if the forex prices were to violate the price levels and are sustained above certain price levels, then a higher level of confidence can be attached to the direction of the price and that the price will likely to continue higher.
The study of fibonacci in trading is therefore an interesting one and more importantly, a profitable one. For the aspiring trader, it pays tremendously to engage in a study of this important method of fibonacci retracement levels and how to apply it in his trading.