# The most Powerful

# Trading Indicator

Of all the trading tools you will ever use
by far in technical analysis is in Fibonacci
Trading (Fibonacci levels) For this
purpose we shall only be discussing
three primary Fibonacci ratios and not
minor ratios, ovals, arcs, bands or the
time axis.
Background on Fibonacci
Leonardo Fibonacci da Pisa was born
around 1170 the son of a city official and
merchant. He became a prominent
mathematician and is credited with the
discovery of what we now call the
Fibonacci series.
After a trip to Egypt he published his now
famous Liber Abacci (Book of Calculation)
in which amongst other things he comes
up with the sequence of numbers.
1,1,2,3,5,8,13,34,55,89>>On to infinity.
If you add one of the numbers in the
sequence to the number before it you
get the next number in the sequence e.g.
3+5=8 and so on. After the first few
numbers in the sequence if you measure
the ratio of any number to that of the
next higher number you get .618 to 1 e.g.
34 divided by 55 equals 0.618. The
further along the sequence you go the
closer to phi you will get.
If you measure the ratio between
alternative number you get .382 e.g. 34
divided by 89 = 0.382 and that's about as
far into the explanation as I care to go. As
a Forex Trader you don't need to know
any of this. All you need to know is if
your charting software has Fibonacci
capabilities. If it does then that will work
everything out for you.
The three Fibonacci ratios we shall use
are .382, .500 and .618 and how we can
use them in our day to day trading.
In an uptrend measure the distance
between point A and point B and in a
downtrend measure the distance
between point A and point B where point
A will always be the lowest recent point
in an uptrend and the highest recent
point in a downtrend.
In the example below you can see a chart
of the daily JPY/USD. Point A is 119.09
and Point B is 123.16. If you calculate the
38.2% retracement you get 121.61, the
50% retracement is 121.13 and the 61.8%
retracement is 120.64. For example.
The difference between 119.06 and
123.16 is 4.07. If you calculate 38.2% of
4.07 you get 1.55. If you then take 1.55
from 123.16 (Point B) you get the 38.2%
retracement of 121.61. You can use the
same principal for the other retracement
levels.
In the next example of the 1-minute Dow
Jones Point A is 7.916.08 and point B is
7.877.70. If you calculate the 38.2%
retracement you get 7892.36, the 50%
retracement is 7896.89 and the 61.8%
retracement is 7901.42. For example.
The difference between 7.916.08 and
7877.70 is 38.38, if you calculate 61.8% of
that you get 23.72. If you then take 23.72
and add it to Point B of 7.877.70 you get
7901.42 the 61.8% retracement. The only
difference between the downtrend and
the uptrend is that you add your
calculations to Point B and in the uptrend
you subtract from Point B.
So how can this information be used?
Well, you would be amazed just how
many times a security will find support or
resistance at Fibonacci levels. a Large
part of this may be that so many traders
use this technique in their analysis that it
is a self-fulfilling prophesy and part
because it falls into the natural order of
the market.
Apply this technique by first identifying a
trend in the market you are following. As
soon as you can see that there is going to
be a retracement you calculate your
retracement levels. You then enter at the
38.2% retracement level and place my
stop loss behind the 61.8% retracement
level.
If you feel the difference between the
38.2% and 61.8% level is to great a risk,
drop down a time frame and use the
same technique but get a much tighter
stop.
Click here for Fibonacci Levels Tutorial

### © Copyright 2018 - FX Hometrader - All rights reserved.