Introduction

     Fibonacci is a really basic tool of technical analysis just like trendlines. Basically, Fibonacci numbers are resultant from adding the previous together to find the next. For example 1+1=2, 2+1=3, 3+2=5, 5+3=8 and so on. The Fibonacci string would look like this: 0,1,1,2,3,5,8,13,21..

     Everytime we would like to see the correction in % of a trend, then we use Fibonacci Retracements. Strong correction levels are: 23,6% ; 38,2% ; 50% ; 61,8%. There are also other levels, 161,8 ; 261,8 ; 423,7 , but these are rarely used and not as effective as the basics Fibo levels.

     Fibonacci in forex is more likely a Self Fulfilling Prophecy. Fibonacci numbers got more attention around 1920, when Ralph Nelson Elliott published a book "Nature's Law " where he stated Fibonacci numbers play a common role at humans. That's why the Fibonacci ratios are the most popular with the well-known Elliot Wave trading.

A fibonnaci retracement. Levels where worked are marked with blue.

How to draw a proper fibonacci retracement?

A proper fibonacci retracement is always draw between the last swing low and swing high. Subjectivity comes again, choosing a swing low and swing high is up to everyone just like the timeframe to draw on.

If upward between the swing high and low then 100% should be placed at the swing low, and 0% at the swing high.

If downward between the swing high and low, then vica versa.

How to use integrated to the strategy?

    Personally, I pay attention only to the 50% fib level because its the very centre between a swing low and high.

    It's important to notice that I pay more attention to the 50% fib (and also to other tools) if its confluenced, which means more technical facts support the level.

In the strategy fibonacci is used to determine a better stoploss level, but not for entries and signals.

Have a question about the tool?

    Ask without any hesitate!

(Written by Stockwalker 2011 June 15 )