Originally developed by Leonardo Fibonacci around the year 1200, the Fibonacci sequence was created as a way of modeling how pairs of numbers could continue to reproduce in an increasing ratio sequence, basically forever. Fibonacci's rules and his sequence and percentages have been used to solve problems in all kinds of fields ever since, and many forex traders use it today to help them find areas of support and resistance on their price charts.
Currency trading incorporating the use of Fibonacci numbers has come in and out of favor over the last 20 years, and the way people have used the numbers in their trading decisions has also evolved over that time. So what does a typical trading plan look like when it incorporates this powerful sequence of numbers to help make trading decisions?
Let's look at what the Fibonacci sequence is and how it works in a currency trading situation. It might help you become more successful as a trader because you'll be able to create a more comprehensive trading plan when you are taking on the market.
At it's core, using Fibonacci in a currency trading environment uses the numbers in the sequence to help identify price objectives and stop loss levels for your trades. Some traders contend that positioning stop losses based on Fibonacci price points can take a lot of the risk out of trading.
To some extent this is true, because by knowing these important price levels, you can keep losses small because in many cases, you are putting them very close to the market. As an example, stop loss levels based on Fibonacci numbers would be below retracements of 38.2%, 50% and 61.8%. With stop levels pre-determined before entering the trade, you know how much risk you are taking, and you can use correct position sizing and manage your trade based based on these levels as well.
The downside of this argument is that you can often get taken out of long-term profitable positions by having your stop loss too close to the market based on these price levels. I guess you have to put your stops somewhere, but a Fibonacci price level is not the best option in every market situation.
The other way Fibonacci numbers are used is when defining price objectives for current trades. A typical Fibonacci based price objective might be 100%, 132% and 162% of the previous price range. Setting and sticking to these price objectives can take some of the excitement out of trading because you have a limit on your profits. The thing you have to remember though is you also get an increased margin for safety, which is a good feeling to have in a market as unpredictable as forex.
So in the final analysis, trading using Fibonacci numbers and percentages can help you enter and exit trades more accurately as well as reducing your risk. Trading fun and excitement is NOT what this business is about; safety and having profitable trades really is the objective. If that's what you are after, adding some Fibonacci to your trading plan can often be a very good idea.
Currency trading incorporating the use of Fibonacci numbers has come in and out of favor over the last 20 years, and the way people have used the numbers in their trading decisions has also evolved over that time. So what does a typical trading plan look like when it incorporates this powerful sequence of numbers to help make trading decisions?
Let's look at what the Fibonacci sequence is and how it works in a currency trading situation. It might help you become more successful as a trader because you'll be able to create a more comprehensive trading plan when you are taking on the market.
At it's core, using Fibonacci in a currency trading environment uses the numbers in the sequence to help identify price objectives and stop loss levels for your trades. Some traders contend that positioning stop losses based on Fibonacci price points can take a lot of the risk out of trading.
To some extent this is true, because by knowing these important price levels, you can keep losses small because in many cases, you are putting them very close to the market. As an example, stop loss levels based on Fibonacci numbers would be below retracements of 38.2%, 50% and 61.8%. With stop levels pre-determined before entering the trade, you know how much risk you are taking, and you can use correct position sizing and manage your trade based based on these levels as well.
The downside of this argument is that you can often get taken out of long-term profitable positions by having your stop loss too close to the market based on these price levels. I guess you have to put your stops somewhere, but a Fibonacci price level is not the best option in every market situation.
The other way Fibonacci numbers are used is when defining price objectives for current trades. A typical Fibonacci based price objective might be 100%, 132% and 162% of the previous price range. Setting and sticking to these price objectives can take some of the excitement out of trading because you have a limit on your profits. The thing you have to remember though is you also get an increased margin for safety, which is a good feeling to have in a market as unpredictable as forex.
So in the final analysis, trading using Fibonacci numbers and percentages can help you enter and exit trades more accurately as well as reducing your risk. Trading fun and excitement is NOT what this business is about; safety and having profitable trades really is the objective. If that's what you are after, adding some Fibonacci to your trading plan can often be a very good idea.
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