By James McKee
After you have nailed down the basics of interpreting a chart and have decided on a time frame that works for you it is time to add further analysis to your chart. Most charting software such as MT4 (meta trader 4), and other proprietary charting systems used by major brokers contain all the tools mentioned herein. Proper utilization of these tools is vital to your success as a trader and must be understood thoroughly. The first (and arguably most important) of these tools is referred to as Fibonacci retracement, and this system is made possible thanks to the famous Mathematician Fibonacci.
Trading with the Fibonacci indicator can seem deceptively easy for some; however, it must be noted that while technical indicators are good guides they are not guarantees. Fibonacci retracement is no exception to this rule and must be adhered to as such; strict reliance on technical indicators can result in staggering losses, and this is why they should be tested prior to being taken live. Results will be mixed at first, and over time once someone has the feel for a new indicator such as Fibonacci they will be able to apply it with more skill over time.
In order to establish Fibonacci levels use the Fibonacci retracement tool on your respective software (MT4, etc…) and draw a line from the top of a trend to the bottom. At this point you will see a graph plotted out within your chart, and if the currency should happen to “break” Fibonacci levels then you know the price of that currency could be poised to move in a big way. The key trading with Fibonacci or any other technical indicator is not to jump in too early, even once the currency has broken Fibonacci levels it is important to wait for “confirmation” prior to making a trade.
Trading within Fibonacci levels is a far safer bet than trading without them, once a currency pair has “bounced” within Fibonacci levels it is a fairly good bet that they will continue to move in that direction. The reason Fibonacci retracement works a good portion of the time on the online forex exchange is that many traders follow the movement of this indicator and trade accordingly; however, traders are not the only people to influence the market, and decisions such as those made by central banks can bring a new spin on any session. Finonacci retracement is often used in combination with EMA levels and Parabolic SAR technical indicators.
Author is a Forex trader and financial analyst residing in Denver, Colorado. To stay up to date on all the latest developments in the financial world and beyond be sure to check out the online forex trading regularly.