The aim of every trader is to make as much money as possible from the fx rates market. To achieve this however, the trader must know how to use different strategies and tools in order to take advantage of the swings of the fx rates market. In this piece, we are going to focus on Fibonacci retracements.
The concept of Fibonacci
The Fibonacci tool comes preinstalled on most platforms but you can also download custom made ones as well. The Fibonacci numbers are easy to identify. They are a series of numbers where the 3rd number is the sum of the previous two numbers. So for instance if you add 1 and 2, you’ll get 3. If you add 2 and 3, you’ll get 5. If you continue the sequence you should have 1, 2, 3, 5, 8, 13, 21, 34, 55.
How do these numbers affect fx rates trading?
With the numbers, you will be able to come up with forex techniques that will help you know when to start expecting a trend change. It is from these numbers that the 38.2%, 50% and 61.8% Fibonacci values were arrived at. In fx rates trading, the market often pulls back to any of the aforementioned Fibonacci percentage levels before it reverses. As a trader, you will have to watch out for the retracements and know if you should place a sell order or a buy order.
It doesn’t matter what strategy you are employing in your trading, with Fibonacci you can easily find trends and also know where to expect a reversal. Traders often use this indicator to know when to take profits and when to re-enter an existing trend. For example, if you are in an uptrend, you can take profit at the 61.8% level and then wait for a pull back to the 50% level for you to re-enter in the direction of the trend.
However, it is important for you to avoid making buy and sell decisions simply because price pulled back or extended to a particular level. It is advised that you get another indicator that will help you confirm whatever information you are looking at on the Fibonacci. You don’t want to be caught out incessantly by whipsaws. Those levels are respected but not 100% of the time. You can plot your Fibonacci levels manually but there are tools online that can also help you do this.
To incorporate the Fibonacci into your trading, just plot it on your charts and follow the information displayed on the chart. If you already have a good trading system, adding the Fibonacci tool can increase accuracy and take it near 90% levels. For you to successfully use the tool though, you first of all need to get comfortable with it and this can only come by practice. Unfortunately, it is near impossible to do back tests using the Fibonacci tool. This means that all your practice to be done in real life market conditions. You can easily do this on a demo account.