One of the strategies that Forex traders can use in order to gain success in the market is the use of the
Fibonacci ratios, a series of number created in the 1200s and named after their inventor and one of the worlds first great minds, the Italian Leonardo Fibonacci. The series starts from zero and one, and it goes on by adding the two previous numbers. Hence, the worlds Fibonacci numbers are as follows: 0,1,1,2,3,5,8,13, and so on. What makes this series of numbers unique and famous is the fact that every number included is approximately 1.618 times greater than the number that came before it.
In the world of Forex trading, the tool used by chartists or technical traders is more aptly referred to as the Fibonacci retracement strategy. This is developed by getting two extreme points, normally a trough and a major peak, seen on a stock chart. These two extreme points vertical distance are then divided by 23.6%, followed by 38.2%, followed by 50%, followed y 61.8%, and finally by 100% - all of which are key Fibonacci ratios. Once done, horizontal lines are then drawn in order to point out possible levels of support and resistance.
It is not clear why but for some reason, as with all things in nature, the Fibonacci retracement strategy plays a vital role in Forex trading. The
Fibonacci ratios are used to identify critical points that may cause a certain assets price to reverse. Once said assets price has retraced to any of the ratios mentioned above, it is expected that the direction of the prior tend continue. One things for sure, thanks to Leonardo Fibonacci, Forex traders are lucky to have this strategy around.
