Forex Traders Daily

When you think of great Italians named Leonardo, the first name that comes to mind has to be Da Vinci (unless you are a teenage girl, in which case you might say DiCapprio, but is he even Italian?) However, if you are a Forex trader, the most important Leonardo who ever lived is Fibonacci.

About Leonardo Fibonnaci

Leonardo Fibonacci was a singular thirteenth century mathematician. He was instrumental in the introduction of the Arabic numeral system into Europe, and he was the first to observe the ratios that arise from a particular series of numbers:

1, 2, 3, 5, 8, 14, 21, 34, 55, 89, 144…

One of the unique characteristics of this number set is that each number in the sequence is the sum of the two numbers immediately preceding it. 1+2=3, 2+3=5, 3+5=8, etc. The ratios of these numbers are derived from dividing any number in the series by the next highest number in the sequence. The ratio is always 0.625, until you reach 89, after which it becomes 0.618. Conversely, if you divide any number after 2 in the sequence by the previous number, the result is 1.6 until you reach the number 144, after which the result becomes 1.618.

You can see these numbers have a unique relationship to each other. The Fibonacci sequence has been called “the golden mean.” Very early on, Fibonacci recognized the value of these ratios to the exchanging of currencies and price data. Using the Fibonacci sequence, ratio sets were derived. The first set - .236, .382, .5, .618, and .768 – is used for Price Retracement Levels.

Using Fibonacci to Trade Foreign Exchange

Fibonacci levels are extremely useful for deciding when to enter a trade. They, however, are not infallible, nor do they work as a stand-alone trading system. What they do is describe the interaction between trend and counter-trend markets. 38.2%, 50%, and 61.8% form the primary pullback levels. A trader can apply these percentages after a trend in either direction to predict the extent of the counter swing.

Fibonacci works, not only because it is based on mathematical principles, but also because so many traders, including banks and other influential trading institutions, utilize the formula. If it were some well-kept secret, the impact on the Market would be null. The numbers work because so many work the numbers. To ignore them would be detrimental to sound trading practices.

The last price retracement is 78.6. It provides an excellent entry because the profits from this turn can be much greater than the others, as the trend is apt to continue for a longer run.

Fibonacci levels can help you determine an entry point, if you are looking to enter a trade. They also provide a solid determination device for setting your stop loss level when you are in a trade.

Leo, not Da Vinci or DiCapprio, but Fibonacci continues to impact currency trading from his centuries-old final resting place. Thanks, Fib!