Fibonacci Retracement Use In Forex Technical Analysis

The ‘Fibonacci Retracement’ most people might ask, “Is that a movie starring Tom Hanks?”. Well no, While It might not be a movie, it is in fact one of the most widely used indicators in Forex Technical analysis. Despite it’s super technical sounding name, it can actually be profitably put to use by anyone who trades currency pairs.

If youve done any kind of forex technical analysis, youve probably noticed that prices do not travel in a straight line up or down. In uptrending currency pairs, prices will go up, then down, then up a little higher, then down again. And this cycle will repeat until the trend is broken. In downtrending currency pairs, the reverse happens.

Fibonacci Retracement To Predict Up-Down Trends

Whenever the price of a currency pair goes against the prevailing trend-down during an uptrend, and up during a downtrend-it is known as a retracement. Many believe that this retracement can be predicted using fibonacci retracement in their forex technical analysis.

If you are involved in trading currency pairs, it would be extremely helpful if you knew how far these retracements will take the price of a pair. For instance if you knew that the price of one of your currency pairs would retrace by 500 PIPs before it resumed its upward trend, then this will give you an opportunity to get in on a trade at an advantageous price point.

Similarly, if one of your currency pairs is in a downtrend, it would be very useful to have a forex technical analysis indicator that could predict an increase by 500 PIPs before continuing its slide.

Why Fibonacci Retracement?

In the 13th century the mathematician, Leonardo Fibonacci, observed that a numerical sequence seemed to repeat itself in every natural phenomena he studied. He determined that one of the properties of this numerical sequence was that the sum of the two preceding numbers added up to the next number. But more importantly, the ratio of any consecutive numbers tended to be around 1.618 or its inverse .618. He believed that this was a universal truth spoken to him through these numbers and these ratios.

Before currency trading became popular, many traders tried to apply the concept of fibonacci retracement to the equities market. One in particular, Robert Prechter, used fibonacci retracement in a theory which predicted a major bull market in the eighties. And then was able to forecast the return of a bear market just ahead of a major crash.

But many forex traders believe that a fibonacci retracement is most applicable in trading currency pairs. They believe that the shear size of the market, combined with the absence of direct regulation creates an environment that is most like nature. As a result, when it comes to forex technical analysis using forex fibonacci retracement is a widely used method to determine entry and exit points for trading.