Fibonacci

Filed under: Learn Forex Trading |

 

Leonardo Pisano Bigollo, also known as Leonardo Fibonacci, was an Italian mathematician who lived in the twelfth and thirteenth centuries. “So what?” you might ask. Well, he brought the Fibonacci sequence of numbers to the west, and it is a formula that is used by many traders of forex.

Whether this is some kind of magical ratio, or a self-fulfilling prophecy, is unclear. But what is clear is that many forex traders use the Fibonacci tool on their charts to find areas of support/resistance. Now, there may be nothing magical at all about these ratios on the forex charts, but if enough people believe in them and trade off their levels, then the idea will be self-fulfilling and they will become strong and significant areas. I myself don’t use many western technical indicators in my trading, but the Fibonacci tool is something that I do use, not to find areas of support/resistance – but rather, to confirm them. It is one more tool that I can use to create a confluence of signals – and the more signals I have pointing to the same thing, then the stronger the trade will be.

 

To use the Fibonacci tool in MT4, simply click on the Fibonacci icon (it has the letter F with several horizontal dotted lines). Then, click on your chart at a swing high/low point, and drag it to the current swing high/low point. It will then show you various retracement levels – these are 23.6%, 38.2%, 50%, and 61.8%. I personally only use the 50% and 61.8% levels, as these seem to be the most used and therefore the most significant. But other traders use the other levels too. The most difficult part of using this tool is to figure out where you should be drawing your levels from. I try to use the most prominent swing/high or low, as this is probably where most traders will be drawing them from. I hope this has provided a basic introduction to the Fibonacci tool – but as always, I do recommend that you do more research before using it on your live account.

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