In forex trading, one of the facts that traders take their sweet time to accept is that it’s a numbers game. In fact, Mathematics is an integral part of your trading.To get more news about sunton, you can visit wikifx.com official website.
Regardless of your trading strategy, it’s the one thing you can’t avoid.
An excellent example of this is during technical analysis. Pretty much every trader uses this form of analysis to get a good grip on how the market moves.
One popular tool used in technical analysis is the Fibonacci.While its name may not sound like a Mathematician’s name, this tool is invaluable for most traders.
In the year 1202, Italian Mathematician Leonardo Fibonacci documented a Mathematical series which later came to be named after him; The Fibonacci series.
The series is basically summing up a number in a series with its preceding number, i.e. 0,1,1,2,3,5,8, …
As the number magnitude increases, the ratio of one number to that of the succeeding number forms a unique pattern. 23.6, 38.2, 50.0,61.8, and 76.4 – all in percentages.
As such, it has come to be known as the ‘golden ratio’. It is the ratio that’s used in Fibonacci trading.
Why is Fibonacci important? While some experienced traders may not be using Fibonacci for trading, it’s a vital tool when it comes to chart analysis. This is because it helps in predicting and identifying the possible retracement and extension points of the market.
By identifying the retracement points on a specific currency pair market, you’ll be able to determine both the resistance and support points.
This makes it easier to determine the market trend, hence helps you know whether to go long or short.
Using Fibonacci also helps you know when to lock in your profits and when to trail. This becomes important, especially in proper risk management.
There are many Fibonacci tools offered by different platforms, and so, you should make a point of learning how to use them.
That said, here’s how to use Fibonacci tools in your trading. Swing high refers to the recent highest price attained by the market, followed by a drop in price. On the chart, it refers to a high that’s accompanied by two lower highs on both its left and right.
A swing low is not so different either. It refers to the recent lowest price attained by the market, followed by a rise in prices. On a chart, it’ll be a low that’s preceded by two higher lows on both its sides.
Once you’ve identified these two points, plot a horizontal line across the chart from these points. These lines become your reversal points.
Instantly, your charting software will fill the margin in between these points with retracement points. These points, 23.6, 38.2, 50.0, 61.8, 76.4, will be your basis for analysis.
Identify the resistance and support areas. You’ve probably come across these two terms a couple of times from other traders. And if you think they are essential in trading, then you’re right.
The resistance point is fundamentally a point in the market, where there are numerous sell orders for a particular currency. On a chart, it’s the ‘ceiling- like’ point where prices stop rising and start falling.
For instance, assuming you’re trading USD/AUD which is on an upwards trend. So, using your Fibonacci tools, you identify your trade is on the 38.2% retracement point.
If the trade keeps rising and hits the 50.0% retracement line, but doesn’t break it, then that point becomes the resistance point.
If that trade then drops back to the 38.2% retracement line and doesn’t break it but instead, rises, then that point becomes the support area.
These points are important because they not only help you understand the trend, but also decide on your entry and exit points.
Another critical concept to understand is that, the more the market tests a resistance point, the stronger it becomes. Also, once the market breaks through a resistance point, the magnitude of the follow-up trend depends on how strong the resistance was holding.
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