How to Use Fibonacci Retracement in Forex Trading - ForeXposed

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Friday, September 15, 2017

How to Use Fibonacci Retracement in Forex Trading


If you start using the demo account and predict the currency movements, then you will find a typical beginners trouble: I know what has happened today, but what about the next movement? There is no sign whatsoever that I can read, because the indicator does not appear a few steps in front of the exact price, but at the moment the prices are.

It is very reasonable because the indicators predict a price based on previous data, aka based on statistical data. So in short, technical indicators using data movement that has happened, put it in the formula, and then to predict the fore. Well, it sounds cool. But this is also a problem because we all know that what happens in the future not necessarily the same as what is happening in the present. The strength of rising prices in the future, not necessarily equal to the strength of the price increase in the present. Likewise, issues that occur.

Well, this is the shortage of technical indicators. It just uses the past to see the future. Similar to the political analysts or football commentators. In fact, we all know that that ball round. Not necessarily a yesterday winning team, could win against another team, tomorrow.

This deficiency was later solved in several ways. Fundamental analysts use the economic news to eliminate this shortcoming and said that technical analysis is so it is. Well, the technical analyst is not to be outdone. Finally, they use chaos theory and chart pattern recognition to eliminate this deficiency. Cool, right?


The Rabbit Problem

In 1240, Leonardo Pisano Fibonacci discovered a sequence named after the name of himself, that is the Fibonacci sequence. At first, this sequence is used to answer a classic math question, about a rabbit. Just intermezzo, rabbit question reads thus:

A man puts a pair of Rabbits in a place surrounded by walls, so isolated from the outside world. How many pairs of rabbits are produced, when a pair of rabbits produce a pair of other rabbit and will also be productive to the next, and so on?

I myself also don't ever count them manually. However Fibonacci successful to count it, by making a series known as the Fibonacci Sequence.

1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144 ...

This is the series that answers the problem of rabbits. So, the answer to the rabbit is about 144 pairs in sequence to 12. It is obtained from the sum of the previous two series, i.e. 89 + 55.

Well, after examined, it turns out that the series was created by members of the family of the Bonacci, not only to resolve the question of the rabbit but being a pattern of calculation in the science of modern physics, especially the branch of chaos theory. Chaos Theory is a branch of mathematics, physics, and also discusses a random movement pattern. Called random it is because never occupies the same coordinates point in each move. Called fractal, because it is always in the same direction.

As an example, the movement of the wings on a butterfly. Although it is chaotic, the movement of a butterfly's wings is always the same from time to time, that is, up and down, although it never occupies the same point at every time moves. That is what is meant by chaos theory. Yes... Yes... I know this is not very correlated with forex discussion. From butterflies to rabbits.

Well, that happened on the market, more or less are the same. Although it looks chaotic in its movement, technical analysts argue, that basically, currency movements still have patterns that can be tracked. Then issued the Fibonacci sequence to extract this price movement. Well, this is the cause why Fibonacci became the science of technical analysis.

Now let's see the Fibonacci sequence, again:

1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144 ...

If I were dividing Un with Un-1 then the result will be like this:

2:1 = 2.
3:2 = 1.5.
5:3 = 1.67.
8:5 = 1.6.
13:8 = 1,625.
21:13 = 1.62.
.....
144:89 = 1.62.

Well, meet a golden ratio of 1.62. Then how about we flip? In the same way, you will find an another ratio, i.e. 0618. Or if you are diligent to divide a specific sequence with another sequence, then you will find the other ratio that has constant value, series to series. The following is the ratios to using Fibonacci in forex: 0236, 0382, 0500, 0618, and 0764. Well, where did those numbers come from, please search it for yourself.


The Fibonacci in Forex Trading

OK, we get to the essence of the use of Fibonacci. In this discussion, we will only discuss the Fibonacci Retracement. You need to know that Fibonacci has 4 variants namely Fibonacci Retracement, Arc, Fan, and Expansion.

Fibonacci is useful to determine the points of support and resistance in the price movement. Its use is quite simple. Just need to connect between the Swing High, Swing Low, and the Price.

Swing High is a higher candlestick that lies between other candlesticks on the right and left. While the Swing Low is reverse for Swing High, i.e. the candlestick that is lower than another candle on the right and left. For more details, look at the following picture:
How to Use Fibonacci Retracement in Forex Trading
 
Well, to use of Fibonacci Retracement, you only need to connect the two points of the Fibonacci lines, then automatically, the Support and Resistance will form there. Very easy is not it? Almost all of the charting software already has complete facilities for the procurement of Fibonacci.

Consider the following image:
How to Use Fibonacci Retracement in Forex Trading
 
Well, the image above is a chart for GBPUSD with 1 H timeframe. The Fibonacci line is on the green from 0.0 to 1.0, is the result for connection point from Swing High and Swing Low. Notice, the retracement lines are able to properly identify areas of support and resistance on the price. Well, the all fifth line of this retracement is useful for support and resistance points. If the price now is between 0.0 and 0.362 line, then the line of 0.362, 0.5, 0.613 and 1.0, are the limits of resistance, and the 0.0 lines are support limitations.

Well as simple as that. About how the price when approaching the area of support and resistance, it doesn't need to be explained more. The art in Fibonacci is how to determine the right Swing High and Swing Low, so that can generate the fitting Support and Resistance. Here, there are no lessons can be given. You need to experience the trial and error to specify one. The more you use it frequently, the more you proficient on how to use it.