Foreign exchange, better known as Forex, currency traders use Fibonacci as a technical indicator. Leonardo Fibonacci, an Italian mathematician in the 12th century, discovered a sequence of numbers, along with their ratios, that frequently occur in nature. The idea is that the numbers identified by Fibonacci will randomly occur more often than other numbers. When applied to Forex, Fibonacci ratios identify frequently occurring price support and resistance levels.
Understand that Fibonacci works best in a trending market. The ratios used to determine retracement levels, also known as support and resistance levels, are 0.236, 0.382, 0.500, 0.618 and 0.764. In an uptrend or downtrend, traders wait for the currency pair price to touch a retracement level before entering a trade. Keep in mind that retracement levels often occur at 0.382, 0.500 and 0.618. The three Fibonacci extension levels, 0.618, 1.000 and 1.618, are used as profit-taking indicators.Step 2
Use your online Forex trading account to plot Fibonacci levels on your chart. Pull up a currency pair and select Fibonacci from the technical indicator list. Analyze the chart and select the high and low price points you want to use. The Fibonacci ratios will be plotted between these points. For example, if you want to trade using a day chart, you could select the highest and lowest prices for the previous month, six months or year.Step 3
Click on the Fibonacci tool indicator on your chart. Starting at the low currency pair price level, click and hold the mouse to draw a line up to the highest price level you selected. When you release the mouse, the software program will automatically draw the retracement lines. If your currency pair is trending up, use these lines as support levels. If you currency pair is trending down, use them as resistance levels. Consider taking a profit when a currency pair in an uptrend reaches 1.000 or 1.618, or when a currency pair in a downtrend reaches 1.000 or 0.618.
- Use the next higher or lower Fibonacci number as a stop to preserve your profit or contain a loss. For example, if your profit target is 0.382, make 0.500 your stop to take your profit.
- Don’t rely on Fibonacci alone to determine trading points. Use other technical indicators such as the Elliot Wave to confirm the Fibonacci information.
Based in St. Petersburg, Fla., Karen Rogers covers the financial markets for several online publications. She received a bachelor's degree in business administration from the University of South Florida.