One of the first decisions every trader makes is when to enter a trade and then when to exit it. Every Trader has their own system, usually adapting an existing one or creating their own. The amazing thing is many of the technical Traders use systems that are based on the ratios created by Fibonacci sometimes without the Trader realising where they came from.Although it is only one part of their techniques it is an important one.
To give you a little background on Fibonacci,he was born in 1170 and became a world reknown mathematician. He published his Liber Abacci (Book of Calculation) and in it he released a series of numbers that if you add the two preceding numbers you get the third number, for example 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144>>>>>>>infinity. (1 + 1 = 2,1 + 2 = 3, 3 + 5 = 8 etc).
The sequence of numbers are not important to the Fibonacci trader, it is the relationship between these numbers (called the golden ratios) that relate to the Fibonacci trading rules. These ratios also relate to many of the patterns that are repeated in both plant and animal (and human)life.
Back to the golden ratios and how they relate to trading. If you measure the ratio of any number in the Fibonacci series to that of the next higher number you will get 0.618 example 21 divided by 34 equals 0.618, if you measure the ratio between the alternate numbers you get 0.382, example 34 divided by 89 = 0.382.
The four main fibonacci ratios for trading are 0.382, 0.500,0.618 and 0.78,if you follow the historical charts(any time frame) for any currency pairing you can see the patterns created follow very closely to the Fibonacci ratios when measuring the direction changes of the currency.
Fibonacci traders use these ratios together with other indicators to predict the pattern changes in the currency. For convenience traders will round these numbers up to 38%, 50%, 62%, 79% .The amazing part is the Fiboncci ratios correspond very closely with when the market will change direction and can give a very good indication when to enter the market and when to exit the market.
It is not important to understand why this seems to work but it does.
If you are just starting as a Trader it is easier to only use 0.618 and 0.382 (there is a bigger difference without using 0.500) as entry and exit points. The most popular entry point is 0.618 with the stop at 1.00.There are many fibonacci calculators that are included in systems, you do not normally have to manually work it out and if you are using an automated system it is interesting to be able to understand why and how they get their entry and exit points.
Use the Fibonacci numbers and see how your trading improves.
Most Fibonacci Traders find this method of trading very successful and it is always worthwhile having extra confirmation of where to enter and exit the market.
Lyndsay is a successful entrepreneur and forex trader. Discover how you can get the best proven forex system and start trading successfully today. For the #1 forex system available check out http://www.best-fx-trading.com/ |
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