Fibonacci Retracement Basics

Forex Indicators

Fibonnaci retracement tools are primarily used by forex traders that use technical analysis to determine support and resistance levels in the market.

It is very commonly used by most technical traders in their forex trading strategy.

Fibonnaci retracements are based of a series of numbers that were found by the famous thirteenth century mathemetician, Leonardo FIbonacci.

A retracement is created by picking two points, usually a high and low point in the price and dividing them by certain fibonacci ratios. These ratios are 23.6%, 38.2%, 50%, 61.8% and 100%.

When a retracement is plotted on the charts, the ratio lines are readily apparent. The lines that represent the ratios can be used as areas of support and resistance.

It is unclear how or why market prices react to these ratios but history has shown us that they do. As such, fibonnaci retracements are always referred to by technical traders before entering a trade.

This instrument is used in all major financial markets ranging from the forex market, stock market and the futures and commodities market.

Some traders have tried to improve the performance of the fibonacci retracement tool by using to to find something called fibonacci confluence. Fibonacci confluence is a method that requires the plotting of two or more fibonacci retracements on the same instrument. These retracements start from the same point but is stretched to different levels of support and resistance.

Areas which are found to have more than one ratio line are considered areas with strong support or resistance.

As such, traders take these areas into consideration before making a decision on the trade to be undertaken.

Fibonacci retracements are never used on their own. They are used in conjunction with other forex indicators to improve their rate of success.

Used in tandem with other indicators in a strategy, fibonacci retracements are a reliable tool that are not often ignored when opening a trade.