Every forex trader must learn about the wide range of trading instruments used to predict movements in the forex trading market. However, some technical trading terms or indicators evoke certain mysteries in some forex traders, especially those that are not old in the market. One of those terms is the Fibonacci forex trading indicator that several people have never across in the course of their trades.
Therefore, it might come as a shock to learn that Fibonacci is an actual thing, and even more surprising is that it is a prevalent trading strategy indicator in the forex market. Forex traders base several technical trading tools on the Fibonacci sequence because it provides various signals that help traders place profitable trades.
What is Fibonacci?
Fibonacci is a technical analysis-trading indicator that provides forex traders with resistance and support levels. The levels make perfect entry and exit points if you use the signals correctly. The indicator is in the form of a sequence discovered by Leonardo Fibonacci in the 13th century, thus the name Fibonacci.
The sequence starts with either a 0 or a 1, followed by another 1. A sequence that starts with 0 looks like this- 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, and so on. The sequence that starts with 1 is very similar to the one that starts with 0 but without the 0. It looks like this: – 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, and so on.
If you study the sequence of the numbers more closely, you will notice that each number is the total sum of the previous two numbers.
Fibonacci Tools in Forex Trading
Fibonacci trading tools are popular among many forex traders, with the most common being Fibonacci retracement levels and expansions, among others. The tools are free and common indicators in different forex trading platforms such as MetaTrader. Once you download the tools, they will not need any other additional downloads, which adds to their popularity.
The Fibonacci retracement tool works at its best with a trending forex market. It uses horizontal lines that show the retracement levels to indicate possible resistance and support levels where the reverse direction of the price is potentially possible. When the market is trending UP at a Fibonacci support level, the idea is to buy or go long on a retracement.
When there is a DOWN trend at a Fibonacci resistance level, the idea is to sell or go short on a retracement. Fibonacci retracement levels attempt to identify future price positions, making them some of the best predictive technical indicators on the forex trading market. The retracement theory is that once the price trend takes a new direction, it retraces or returns closer to the level it held previously before resuming in its trend direction.
Fibonacci retracements help to determine or identify future price positions and their retracement levels. In contrast, Fibonacci expansions help determine where the prices might end up after retracement exhaustion. The new price levels then show in an area of a chart that ordinary charting tools cannot gauge support and resistance easily, making the tool useful in picking profit targets during the forex trading trends.
When there is an upward currency pair trend, the price temporarily moves its counter to the trend, referred to as retracements or pullbacks. The price resumes back its initial position with occasional new high breaks after exhaustion of a counter move, and this is the best tie to use the Fibonacci sequence.
Most Common Mistakes Traders Make When Using Fibonacci Retracements
Even though Fibonacci retracements are a popular tool with immense forex trading success, misusing the same can lead to devastating results. Some of the most common mistakes traders make while using the technical analysis tool include:-
- Depending solely on Fibonacci and ignoring other analysis tools
- Failure to pay attention to long-term trends
- Using Fibonacci only in the short term trading trends
- Mixing up Fibonacci reference points
Wrapping it up
No doubt, the Fibonacci technical analysis indicator is not an easy sequence to understand, as it requires many algorithms that many traders do not have the patience to master. However, Even as difficult as it is, it remains one of the best trading tools in the forex market, with traders reporting many successful trades after using the indicator.