We use a range of cookies to give you the best possible browsing experience. By continuing to use this website, you agree to our use of cookies.
You can learn more about our cookie policy here, or by following the link at the bottom of any page on our site.

0

Notifications

Notifications below are based on filters which can be adjusted via Economic and Webinar Calendar pages.

Live Webinar

Live Webinar Events

0

Economic Calendar

Economic Calendar Events

0
Free Trading Guides
EUR/USD
Bullish
Low
High
of clients are net long.
of clients are net short.
Long Short

Note: Low and High figures are for the trading day.

Data provided by
Oil - US Crude
Bullish
Wall Street
Bullish
Low
High
of clients are net long.
of clients are net short.
Long Short

Note: Low and High figures are for the trading day.

Data provided by
Gold
Bearish
GBP/USD
Bullish
USD/JPY
Bearish
More View more
Real Time News
  • The Spinning Top candlestick pattern forms part of the vast Japanese candlestick repertoire with its own distinct features. Gain a better understanding of the spinning top candlestick here: https://t.co/yXomAftdv8 https://t.co/wOQAHZVnxB
  • Forex trading, which is the act of exchanging fiat currencies, is thought to be centuries old – dating back to the Babylonian period. Learn about the history of Forex here:https://t.co/ePTJlbUP7c https://t.co/WS2LkCt9gX
  • Two major events will dominate #Euro trading in the coming week: an #ECB meeting on Eurozone monetary policy, followed by an #EU summit to reach agreement on a recovery fund. Get your #currencies update from @MartinSEssex here: https://t.co/wnXjTDizMv https://t.co/tmxDfkgmSv
  • There are many different types of forex orders, which traders use to manage their trades. While these may vary between different brokers, there tends to be several basic FX order types all brokers accept. Learn about different FX order types here: https://t.co/lIJdiz4xSz https://t.co/UQRaKusFP7
  • The continuity seen across these volatility cycles is a good thing. Historical precedence offer a blueprint for identifying conditions supportive for a vol-event to occur, and how they may unfold. Deepen your knowledge of historical volatility here:https://t.co/vg7w10la3j https://t.co/nUvvI3WQpx
  • Australian Dollar is up fractionally this week with Aussie stalling just below the yearly range highs. Here are the levels that matter on the $AUDUSD technical chart. Get your #currencies update from @MBForex here: https://t.co/jYzBK1qH4s https://t.co/gYj4tFbsGS
  • What is the road ahead for equities this coming week? Check out my fundamental outlook below! #DowJones #SP500 #DAX30 #FTSE100 https://www.dailyfx.com/forex/fundamental/forecast/weekly/title/2020/07/11/Dow-Jones-SP-500-DAX-30-FTSE-100-Outlook-Stocks-Week-Ahead.html?CHID=9&QPID=917702&utm_source=Twitter&utm_medium=Dubrovsky&utm_campaign=twr https://t.co/HjIBDKqwvO
  • #Gold price gains seem to depend on monetary stimulus expansion and may turn lower as contraction of the Federal Reserve’s balance sheet underpins the US Dollar. Get your #metals update from @DanielGMoss here: https://t.co/8NHLc8jdhw https://t.co/0YYKXqtY9V
  • Japanese candlesticks are a popular charting technique used by many traders, and the shooting star candle is no exception. Learn about the shooting star candlestick and how to trade it here: https://t.co/OjTZOQEytM https://t.co/DDCWX1In7k
  • The US Dollar is pressured as rising coronavirus cases fail to dent 2021 GDP bets. Could the Singapore Dollar, Indonesian Rupiah, Philippine Peso and Malaysian Ringgit rise? Find out from @ddubrovskyFX here:https://t.co/u1qhaIGGoC https://t.co/kvFgxQjLb0
The ‘Magic’ Behind Fibonacci

The ‘Magic’ Behind Fibonacci

2014-08-22 19:00:00
Rob Pasche, Forex Trading Instructor
Share:

Talking Points:

  • Fibonacci Retracement tracks the pullback after an extended move
  • Traders eye 38.2%, 50%, and 61.8% retracements as possible reversal levels
  • Fibonacci’s ‘magic’ comes from its self-fulfilling nature

Of all of the support and resistance tools taught by the DailyFX team and myself, the tool I receive the most questions about is the Fibonacci Retracement. Maybe it’s due to the intriguing name, or because it looks complicated at first glance, but “Fibs” are usually on technical traders’ short list of tools they would like to learn more about.

Today, we take a look at how to use the Fibonacci retracement tool on our charts and uncover the “magic” that can make it work.

Where to Draw the Fibonacci Retracement?

Unfortunately, Fibonacci will not automatically appear on your chart like a moving average or RSI will. We must draw on the chart ourselves where we would like the Fibonacci to go. But where exactly is that? For starters, we need to identify an extended move up or down on our chart. In other words, a swing low followed by a defined high or a swing high followed by a defined low. Below, we have an example of a swing high (labeled 1) followed by a swing low (labeled 2).

Learn Forex: Drawing Fibonacci Retracement on a Chart

The ‘Magic’ Behind Fibonacci

(Created using Marketscope 2.0 charting package)

The Fibonacci Retracement requires us to mark these two points, left-to-right. So after clicking the Fibonacci Retracement button at the top of our Marketscope charts, we would click point 1 and drag down to point 2 and release. The tool will do the rest of the work for us.

What Do the Fibonacci Lines Mean?

After drawing the two data points, we see 3 blue lines appear between the high and the low: 0.382, 0.500, and 0.618. These numbers represent how far price could retrace in percentage terms. So if price rose back to the 0.382 level, that would be a retracement of 38.2% of the original move. If price rose to the 0.500 level, that would be a retracement of 50% of the original move. If price rose to the 0.618 level, that would be a retracement of 61.8% of the original move.

We can see these levels labeled in the chart below as potential resistance levels. These are price levels that price could bounce off of.

Learn Forex: Fibonacci Retracement Projecting Potential Resistance Levels

The ‘Magic’ Behind Fibonacci

There is no exact science to determine which level price will bounce or if price will bounce off any of the levels at all. But time and time again, we will see price bounce off of one of these three retracement levels created by using Fibonacci.

Why Does Fibonacci Seem to Work?

This is probably the most popular question I get regarding Fibonacci. Why does price bounce off these levels? What is the ‘magic’ that causes this? In my opinion, there is no magic involved in it at all. What causes price to sometimes react around these levels is due to the fact that many people are watching these exact same levels.

If we have a large number of traders all looking at the same levels for a turnaround in price, they could create a cluster of orders that causes price to actually turn around at that level. It won’t always be that cut and dry, but that is the gist of using this type of tool. We are expecting other traders to be looking at these levels and cause price to react at these levels. It is self-fulfilling,

Learn Forex: Price Bouncing Off Fibonacci’s 38.2% Retracement Level

The ‘Magic’ Behind Fibonacci

The chart above shows the outcome of our example. Price retraced up to the 38.2% retracement level and stalled for a while before moving back in the direction of the original move. Traders that traded the potential bounce off of this level had a very successful trade without having to take on a lot of risk if they used a tight stop.

Fibonacci Fraternity

So hopefully this article has unlocked the mystery behind Fibonacci by showing how to draw this tool on a chart and by teaching why the Fibonacci can, at times, create successful trades. You are now on your way to joining the Fibonacci club. If you would like to try the Fibonacci Retracement tool risk-free, download a Free Forex Demo account today with free charts and real-time pricing data. It takes seconds to create and minutes to setup.

Good trading!

---Written by Rob Pasche

Start your Forex trading on the right foot with the Forex Fast-Track Webinar Series. This 4-part, live webinar course is the disciplined Traders’ Fast-Track to the Forex Market. Topics include:

  • Using FXCM’s award-winning trading platform
  • Calculating Leverage and reducing risk
  • Trading with a simple (yet effective) trading strategy
  • Maintaining for Forex account and enrolling in on-going education

This course is completely free, so sign up or watch on-demand today.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

DISCLOSURES

News & Analysis at your fingertips.