Using Fibonacci Analysis To Create Trading Strategies
Learn how to use fibonacci retracements to identify support and resistance
Technical and fundamental analysis are based on the assumption that things that have happened in the past will often indicate what will happen in the future. Fundamental analysts depend on the past underlying financial performance of a company, economy or industry to make forecasts while technical analysts will look at past currency price movements for the same purposes. From that perspective you can imagine fibonacci analysis as the technical equivalent to the fundamentals of interest rates or trade flows.
Video Analysis: Forex Fibonacci Analysis – Part One
Fibonacci analysis gives us a way to forecast levels of support and resistance and project price targets. It can be used to set stops as well as timing entries, however, the most valuable information is what it can tell us about risk. In this lesson we will be introducing a few of the tactical concepts and tips you will need to understand these tools and begin using them as a technical analyst.
the subsequent sections in this article I will examine several case studies to understand how these ratios work in the live market and why they are considered one of the most important tools available to technical analysts.
What are the ratios and how are they used?
I will spare you the long, historical (and mostly erroneous) explanation of where the Fibonacci ratios come from and how they appear in the natural world except to say that fibonacci analysis is based on the fibonacci number series and the Fibonacci ratios, which are then applied to price charts.
While there are many Fibonacci ratios, in my experience, it is sufficient to stick with the standard levels of 23.6%, 38.2%, 50%, 61.8%, 100% and 161.8%. Slicing these levels into thinner segments results in a crowded chart and probably won’t improve your analysis.
How are fibonacci ratios calculated?
The ratios are based on the distance between fibonacci numbers. If we use three numbers from a simple fibonacci series (1,1,2,3,5,8,13,21,34,55…) you can see how this works in the examples below.