By Chris Donnell
The Fibonacci Forex concept is the crux of numerous successful investment systems, and it is used by a tremendous number of forex professionals. This ancient mathematical concept has spawned huge profits for those adherents who have the required discipline and work ethic to follow it religiously.
Fibonacci was a renowned mathematician who is remembered for his Fibonacci patterns, which is a mathematical sequence with relationships between each number and the sum of the previous two – 1,1,2,3,5,8, etc. However, currency trading is more concerned with the fractional relationships between the values, such as .236, .5,and .382, which are used to indicate critical price levels by defining the likely scope of a price “retracement”, or a move against the direction of the primary trend.
Also, this information is used as a leading indicator, or a predictor of price. Therefore correct use of the Fibonacci principles will enable one to pinpoint important price moves in advance, or in essence to predict the future activity of the futures market in question. Indeed, one can correctly estimate the behavior of the forex futures market!
As an example, the .382 fraction is universally popular among professional forex traders. The wild price swings of the forex futures are easily observed on a price chart, with the attendant extreme highs and lows which typify market behavior. The maximum of an up move is referred to as resistance, the minimum low after a large drop is called support.
The first step is to calculate the distance from top to bottom of the market in your preferred time horizon, such as daily, weekly, monthly, etc. Multiply the result by the established Fibonacci value of .382. If the move in question is an upward trending one, you will then subtract the value from the high of the price move to establish support, and conversely you would add the value to the bottom to find the appropriate resistance level to watch.
Having this data at your fingertips will enable you to put into play an action plan to establish a position with an excellent chance of a trading profit. If you applied the .382 Fibonacci fraction to an upward price move, you will be trying to put in a likely support area for a future increase in price, and if you use the ratio with a decrease i price, you will be establishing a likely support level.
All successful futures trading systems revolve around the key concept of exiting loser trades with little financial damage, and the Fibonacci is no different. The predicted price areas typically work out, and the winners are very lucrative, while the losers are usually small. In fact, all trading, whether futures or equities, requires a mechanism for limiting losses and maximizing profits.
About the Author
Chris Donnell is CEO of LeverageFX.com and developer of one of the most high probability and profitable Forex currency trading system which gives statistically probable entry and exit levels based on cross currency currency comparisons.
