Fibonacci Forex Signals
The Fibonacci Series is an extremely useful and common numerical pattern encountered in both mathematical studies and in nature itself. The easiest way to compute it is beginning with zero and one, and then adding each two successive numbers in the series in order to derive the next. The resultant pattern will take the form of (0,1,1,2,3,5, 8, 13....) where each number is the sum of the preceding two. This sequence is found in the arrangement of veins in tree leaves, in the arrangement of the flowers of an artichoke, in the foreign exchange market, along with a large number of other microscopic and macroscopic natural formations.
It has been noticed a long time ago that patterns in the market also resemble the sequences created by the Fibonacci Ratios. These ratios are the 0.386, 0. 618, and 1. What is significant about these ratios is that they are the proportions between any element of the Fibonacci series and its preceding numbers. In example, the ratio of 8/13 is 0.618 which is the inverse of the famous Golden Ratio. 8/21 is close to 0.38, which is the other most significant ratio in forex analysis. In forex, it is very common to use these ratios instead of the raw numbers because of the difficulty in depicting them as an infinite series.
So how do we use the Fibonacci Series? The theory on the use of this series claims that each complete movement on the price chart is likely to be extended, or corrected by a following price movement the size of which is determined by multiplication with one of the Fibonacci ratios. For example, If the first leg of an uptrend takes the price quote from 1 to 2, the second leg of the trend will take it to either (1+0.38*(21)), or (1+0,618*(21)). The (21) multiplier of our calculation simply states the size of the first price movement, while the other component states the size of the extension. In the case of a retracement, we would subtract the numbers 0,61 or 0,38 from 1, to obtain the retracement amount.
The Fibonacci series can be used to measure the horizontal, vertical extensions or retracements of the price action, as well as the duration of time phases. With the Fibonacci time series, for example, each successive up or down phase of a trend is thought to take a place with a duration that is proportional to successive items in the Fibonacci series. For example, if in time x, a headandshoulders pattern develops, in time period of duration 2x, an uptrend would occur, in 3x, a triangle, 5x, a downtrend, and so forth, each component being determined by multiplication with a member of the Fibonacci Series.
It is beyond doubt that the Fibonacci Series is one of the most useful in forex analysis, due to its proven nature as a mathematical concept. Nonetheless, the signals emitted by it are by no means of certain value. Where you begin to draw your Fibonacci lines can make all the difference between a buy or sell order, and it is a good idea not to get carried away about the performance of our trades on the expectation that we have the magic key. Still, it can be a great addition to a traders arsenal in the difficult encounters with the chaotic price action of the forex market. Make sure that your forex broker allows the drawing of Fibonacci lines on the charts.
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