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Understanding the Fibonacci Trading System

The Italian mathematician Fibonacci or Leonardo Pisano was born in Pisa in 1170. His father, Guglielmo Bonaccio, worked at a trading office in northeastern Algeria. Fibonacci studied mathematics at Bugia when he was young, and he learned about the benefits of the Hindu-Arabic numeral system throughout his lengthy trips.

What are Fibonacci retracements?

The numbers used in Fibonacci retracements are not figures in Fibonacci's sequence in the sense of buying and selling; rather, they are extracted from statistical relationships between numbers in the sequence. The source of the 61.8 percent 'golden' Fibonacci ratio derives from dividing a number by the number that follows it in the Fibonacci series.

For example, 89/144 = 0.6180. The ratio of 38.2 percent is obtained by dividing a number by the number of positions to the right in the Fibonacci series. E.g.: 89/233 = 0.3819. The 23.6 percent ratio is extracted from the division of a number by the number of three positions to the right in the Fibonacci sequence. For instance: 89/377 = 0.2360.

By taking high and low points on a graph and labeling the main Fibonacci ratios of 23.6 percent, 38.2 percent, and 61.8 percent horizontally to create a grid, Fibonacci retracement amounts are represented. To distinguish potential price reversal points, these horizontal lines are used.

Fibonacci and Trading

The stages of Fibonacci retracement are straight lines suggesting likely levels of support and opposition where Forex, CFDs, or other trading prices might theoretically shift direction. The first thing that you should note about the Fibonacci mechanism is that it works better when the economy is booming.

When the market is trending higher, the strategy is to go long (or purchase) on a retracement at the Fibonacci support point. And to go short (or sell) at a Fibonacci resistance stage on a retracement while the price is trending down. 

If they aim to anticipate where prices will be in the future, Fibonacci retracement patterns are considered a reliable technical measure in Forex or CFDs. The idea is that when the price starts a new trend path, before resuming in the course of its trend, the value will retrace or revert part way back to an earlier price level.

Understanding Retracement rate of Fibonacci

You have to search the new major high or low swings to find these Fibonacci retracement stages. Those levels become self-fulfilling forms of support and resistance because traders utilize the Fibonacci method. If sufficient market players expect that a retracement may occur at a Fibonacci retracement rate and are preparing for a spot to be opened when the price hits that level, then the stock price will be influenced by all those outstanding transactions.

One factor that you should consider is that the price will not always recover from these amounts. They can be treated as areas of danger. Traders would still position their orders at Fibonacci retracement levels if they were that easy, and the markets would move indefinitely.

 

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