Fibonacci Forex Indicators
Fibonacci numbers are sequences of numbers where each successive number is the sum of the prior 2 numbers (i.e., 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, etc...). The Fibonacci number pattern was developed by Leonardo Fibonacci sometime around 1200 AD. For inexplicable reasons, these numbers play a meaningful role in the technical analysis of financial markets (including the currency trading market), particularly with respect to changes in direction.
There are four main Fibonacci indicators: Fibonacci Fans, Fibonacci Retracements, Fibonacci Time Retracements and Fibonacci Arcs.
For an example on how to use these four Fibonacci Forex indicators on actual charts, open up your copy of Forex Trader Pro (if you do not have a copy, you should obtain a free demo account) and bring up a chart. For this discussion, we will use the USD/JPY, with candlesticks and 30 minute time intervals. First note the 4 locations of the applicable Fibonacci indicator buttons on the left for the four different Fibonacci Forex indicators.
Fibonacci Retracement. First, let's set up a Fibonacci Retracement. Click on the Fibonacci Retracement button and then pick a low point and a high point and draw from one to the other. In the chart below, 117.13 was selected as the low and and 117.73 was selected as the high. You will see horizontal lines drawn at both these high and low points. Next, you will see 4 different Fibonacci Retracement levels reflected in horizontal lines at the 38.2%, 50%, 61.8% and 78% retracement levels (representing retracement of that percentage of the difference between the high (117.73) and low (117.13) selected for the indicator. Why are these levels used here (and elsewhere)? Divide one of the numbers in the Fibonacci series by the number that follows it and you get 0.618. Divide one of the numbers in the Fibonacci series by the number that precedes it and you get 1.618. It is widely understood that almost everything with dimensional properties adheres to a ratio of 1.618. When used in technical financial analysis, this ratio is trans morphed into these Fibonacci levels (i.e., 38.2%, 50%, 61.8% and 78%).
You will note a few selling candle wicks protruding downward (on the right side of the chart) towards the 61.8% retracement level (at 117.36%) , but failing to break through. Many traders use these retracement levels when determining where to enter the market, as well as places to put stops and in setting targets. Hence, in some respects, these levels become self fulfilling prophecies. Hence, if for no other reason, these levels are worth monitoring.
*To clear a Fibonacci indicator in order to display another one, right click on the chart and then select "Clear All Primitives." The existing Fibonacci indicator should disappear.
Fibonacci Fans. A Fibonacci Fan uses a similar methodology as a Fibonacci Retracement indicator, except that the Fibonacci support and resistance levels are shown via diagonal lines at each price point. A Fibonacci Fan is created by clicking on the Fibonacci Fan icon and then drawing a line from a low to a high point or vs-a-vera. The program will then automatically generate the Fibonacci Fan lines.
Fibonacci Time Retracements. Fibonacci Time Retracements are vertical lines placed on a chart in a manner which corresponds to each of the Fibonacci numbers (1,1,2,3). They are used to identify when a significant change in price will occur (i.e., near the time line).
Fibonacci Arcs. Fibonacci Arcs use a similar methodology as the preceding Fibonacci indicators, except that the Fibonacci support and resistance levels are shown via curved lines. Fibonacci Arcs are created by clicking on the Fibonacci Arcs icon and then drawing a line from a low to a high point or visa-vera. The program will then automatically generate the Fibonacci Arc curved lines.
Conclusion. Fibonacci indicators are generally not used by themselves to make trading decisions. However, many traders find them useful when used with other indicators. As noted above, because of their popularity, traders should be cognizant of the relative Fibonacci indicator levels since many other traders are following them as well.