What is Fibonacci confluence?
The various Forex currencies frequently journey in measured moves. A strong sustained move for a certain direction will typically retrace a percentage of the move before seeing a continuation higher. Forex traders will use the Fibonacci retrace tool to map out the common ratios for retraces which include the following: 23.6, 38.2 and 61.8%. 50% is another common level as the half way point of a move but does not fall under the Fibonacci sequence levels. Traders use these levels to attempt to forecast the extent of a pullback retrace.
Fibonacci extensions are also popular and these occur as the currency pair moves further than the 100% level of a preceding wave. The main Fibonacci extension points are 1.618 and the 1.272 measurement of price.
The attached chart shows how a combination of retrace and extension levels can be very powerful when the points happen at the same time. This GBP/USD chart has a Fibonacci confluence of 1.272 and 1.618 extensions and a 38.2 retrace. There is also a Fibonacci harmonic price pattern highlighted on the chart but this is beyond the scope of this article.
These points have been highlighted on the attached chart. They are all pointing towards the level that price turned from a sustained down trend and moved hundreds of pips higher on this occasion. It goes without saying that this confluence won’t always provide winning trades but you may want to look into this area further if you haven’t before.
See further Fibonacci Confluence examples at the authors blog.
