What is Fibonacci in Forex Trading?

Fibonacci

Fibonacci, a concept used in Forex Trading technical analysis, was named after Leonardo Fibonacci, a famous Italian Mathematician who discovered the Fibonacci ratios.

Fibonacci ratios are numbers obtained by dividing two numbers in a sequence. For instance, look at this sequence: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144.

What do you notice with the numbers? Well, the sequence is obtained by adding consecutive numbers starting with 0, that is:

0+1 = 1; 1+1=2; 2+1=3; 3+2=5; 5+3=8…55+89=144

When you measure the ratio of any two consecutive numbers in the sequence above, you get the Fibonacci ratio 0.618. For instance, 34/55=0.618.

If you divide two alternate numbers, e.g. 34/89, you get the Fibonacci ratio 0.382.

Fibonacci Retracement and Extension

There are many Fibonacci terms, but only two of them are necessary in forex trading: extension and Retracement.

Fibonacci sequence refers to a ratio obtained by adding only two numbers to form a third number, and the second number is added to the third number to form a fourth number. When the last number is divided by the second last number, the ratio is about 1.618.

This is just a basic introduction to let you know how Fibonacci came about. Nonetheless, in Forex Trading you won’t actually need to calculate those rations because they are often included in your Trading platform.

Every Forex trading broker will place the Fibonacci icon somewhere in their trading tools. You only need to click the icon and set the time period, currency pair or asset, and any other information that may be required by your broker to calculate the Fibonacci.

For now, you only need to know the principle or idea behind the Fibonacci retracement. The term actually means that the price of an asset (Forex for us) retraces back to its previous position or price level before going in its initial direction.

Fibonacci retracement levels can be viewed as a point of resistance or support; while the extension level is used as a take profit level. Look at the example below:

What is Fibonnaci in Forex trading?

In the figure, Fibonacci retracements are expressed in terms of percentages such as 23.6, 38.2, and 61.8. Other ratios such as 50.0 sometimes throw themselves into the fray once in a while. We’ll see how this chart is derived in our next lesson. Read on!

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