Forex stands for Foreign Exchange Market and is where investors trade foreign currencies. The Forex is the largest financial market in the world and is open and trading 24 hours a day, seven days a week. Investors and traders buy and sell certain pairs of foreign currencies based on their belief that the value of one will change against the other. It is truly a numbers game where investors must use ratios to analyze the trends and then make their trades. Really savvy investors use the Fibonacci numbers to enhance their technical analysis of the trends on the Forex.
Forex And Fibonacci
Fibonacci was discovered by Leonardo Fibonacci and is a sequence of numbers which start at 0, then 1, then 0+1 or the first and second number added together. This is how all the following numbers are calculated. When the ratio of these numbers is measured against one another, you have the Fibonacci Ratios which are the ratios used in Forex trading.
Forex traders do not manually calculate these ratios. Instead, they use the Forex trading platforms which provide the info required to derive the Fibonacci levels which is all they need. They just need to know how to use the Fibonacci levels in the technical analysis and they are ready to trade.
Traders who use the Fibonacci levels are conducting what the market calls Fibonacci trading. This simply means to know when the market will move forward or when it will reverse. The Fibonacci levels serve as resistance and support, meaning when the price goes down, they support and when it goes up, they serve as resistance. Also, if a Fibonacci level is broken when resisting, it can then act as a support and the trader can retest it. This works both ways, both resistance, and support.
Why Do They Work?
While Forex traders acknowledge and use the Fibonacci levels, they are not sure of the relationship between the Fibonacci numbers and the prices of the currencies. What is true, however, is that the Fibonacci numbers work. Most traders use Forex charts to track the currency prices and trends. These charts often contain the Fibonacci numbers which the traders use to identify the bottom and top of a previous trend. If the previous trend is an upward trend, they will draw the Fibonacci levels from bottom to top and then extend the lines to cover the next trend. If the trend is downward, the traders draw the levels from top to bottom and then extend the line out to cover the next ongoing trend. It is important that a trader not draw the Fibonacci levels until the trend is matured. If there is no completed trend in a certain time frame, the trader must look for one in a bigger or smaller time frame within the same currency pair.
Using Fibonacci levels is one of the best tools of a Forex trader. These numbers help the trader predict the next trends and then make their buy and sell orders accordingly.