Fibonacci tool in forex is a technical analysis tool that is used to detect strong price levels and it is made by use of Fibonacci sequence. Fibonacci sequence is a natural pattern. As golden ratio in Fibonacci numbers is also a natural pattern that’s why it is used in the Fibonacci tool to predict price levels.
What is the golden ratio in Fibonacci numbers?
Fibonacci series is a sequence of numbers formed by adding the recent number to the previous number. For example, 0,1,1,2,3,5,8,13,21…
These numbers are important because they are used widely in nature. Like we have two legs and two is a Fibonacci number. We have 5 fingers and 5 is a Fibonacci number. The number of petals on a flower is 8 and 8 is a Fibonacci number. That is the main reason for its importance.
If you divide a number by the previous number I’m series then you will get the same unique number and it is called the golden ratio that is 1.618. That is why we use the golden ratio as a technical analysis tool to predict the price. Fibonacci really works. Many traders say that it does not work but I have shown you the reason behind the golden ratio.
Fibonacci tool in technical analysis works. If it is not working for you then your method of using the Fibonacci tool will be wrong. Like if a human arm length is 100% from hand to elbow, then the length from elbow to hand will be 61.8%. The same is the case in technical analysis. If the Price moves 100 pips then the next pullback in price will be 61.8 pips. This phenomenon is to just educate you about the Fibonacci tool and how it relates to nature. It does not mean that price will always move exact 61.8 pips. Natural patterns always repeat after a specific interval of time.
Fibonacci retracement forex
Retracement in forex refers to pull back after an impulsive move in price during a swing/wave. Fibonacci retracement refers to a retracement in price to Fibonacci level 61.8% or 50% in forex trading technical analysis. As 61.8% is a golden percentage so most of the time, the price will bounce from 61.8% Fibonacci level and then will continue next move. 50% Fibonacci level also acts as a strong level.
How to draw Fibonacci retracement levels
To draw Fibonacci retracement levels, pick the Fibonacci tool and drag it from the low to high point of a wave (in the case of the bullish wave). On the other hand, drag the Fibonacci tool from the low to the high point of a wave (in case of the bearish wave). Fibonacci is a great tool used for technical analysis in forex trading.
Golden zone in forex
A zone formed between Fibonacci 50% and 61.8% acts as a golden zone in forex. The Golden zone will increase the probability of winning.
Fibonacci extension in forex
Fibonacci Extension levels predict how far the price will move. 1.618 and 1.272 levels act as strong Fibonacci Extension levels. After completion of a wave, the Fibonacci extension tool forecasts the price for the next wave.
How to draw Fibonacci extension levels
To draw Fibonacci extension levels, just drag the Fibonacci tool from high to the low point of the retracement wave (in case of bearish retracement). On the other hand, drag the Fibonacci tool from low to the high point of retracement (in case of bullish retracement).
Remember to draw the Fibonacci retracement tool only on the impulsive waves and the Fibonacci extension tool on retracement waves.
Advanced Fibonacci tool usage
Retracement of wave predicts the strength of the upcoming trend.
- Deeper retracement means a weak upcoming trend
- light retracement means a strong upcoming trend
For example, see the image below
- if price retraces to 78.6% fibonacci level then price target will be at 100% level.
- if price retraces to 61.8% fibonacci level then price target will be at 1.272 extension level.
- Price retracement to 50% fibonacci level only will give a price prediction to 1.618 fibonacci extension level.
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Note: All the viewpoints here are according to the rules of technical analysis and for educational purposes only. we are not responsible for any type of loss in forex trading.