What is a Fibonacci Sequence?
The Fibonacci sequence is a series of numbers where each number is the sum of the two preceding ones, typically starting with 0 and 1 (e.g., 0, 1, 1, 2, 3, 5, 8, 13, 21, ...). In trading, the Fibonacci retracement levels are derived from key ratios (23.6%, 38.2%, 50%, 61.8%, and 100%) based on this sequence. These levels are used to identify potential support and resistance zones where price reversals or continuations may occur.
Application in Forex
In Forex trading, Fibonacci retracement is a popular technical analysis tool applied to chart price movements to predict future price action:
- Identifying Support and Resistance**: Traders draw Fibonacci levels between a significant high and low on a chart. For example, after a price drop, the 61.8% retracement level often acts as support where the price might bounce back.
- Entry and Exit Points**: Forex traders use these levels to determine optimal entry points (e.g., buying near a 50% retracement) or exit points (e.g., taking profit near a 23.6% retracement after a rally).
- Stop-Loss and Take-Profit**: Fibonacci levels help set stop-loss orders below support (e.g., below 61.8%) or take-profit targets near resistance (e.g., 38.2% or 50%).
- Trend Confirmation**: In a downtrend, if the price retraces to the 38.2% level and resumes falling, it confirms the bearish trend. Conversely, a break above this level in an uptrend may signal bullish momentum.
Example in Practice
On the XAU/USD chart, if the price drops from 3.344.70 USD to 3.312.570 USD, Fibonacci levels can be plotted. The 38.2% retracement might fall around 3.330 USD, serving as a potential support zone for traders to watch.
The Fibonacci sequence is a series of numbers where each number is the sum of the two preceding ones, typically starting with 0 and 1 (e.g., 0, 1, 1, 2, 3, 5, 8, 13, 21, ...). In trading, the Fibonacci retracement levels are derived from key ratios (23.6%, 38.2%, 50%, 61.8%, and 100%) based on this sequence. These levels are used to identify potential support and resistance zones where price reversals or continuations may occur.
Application in Forex
In Forex trading, Fibonacci retracement is a popular technical analysis tool applied to chart price movements to predict future price action:
- Identifying Support and Resistance**: Traders draw Fibonacci levels between a significant high and low on a chart. For example, after a price drop, the 61.8% retracement level often acts as support where the price might bounce back.
- Entry and Exit Points**: Forex traders use these levels to determine optimal entry points (e.g., buying near a 50% retracement) or exit points (e.g., taking profit near a 23.6% retracement after a rally).
- Stop-Loss and Take-Profit**: Fibonacci levels help set stop-loss orders below support (e.g., below 61.8%) or take-profit targets near resistance (e.g., 38.2% or 50%).
- Trend Confirmation**: In a downtrend, if the price retraces to the 38.2% level and resumes falling, it confirms the bearish trend. Conversely, a break above this level in an uptrend may signal bullish momentum.
Example in Practice
On the XAU/USD chart, if the price drops from 3.344.70 USD to 3.312.570 USD, Fibonacci levels can be plotted. The 38.2% retracement might fall around 3.330 USD, serving as a potential support zone for traders to watch.
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