Fibonacci is a math sequence in which a number is formed by the addition of two consecutive numbers and this number if added to the bigger number of two consecutive numbers will form the next Fibonacci number, for example, 2 +3 = 5 and if 5 is added to 3 then it makes 8 that is the next Fibonacci number. This means that all the numbers of any Fibonacci sequence have a relationship. Leonardo de Pisa has invented this concept of Fibonacci numbers. Fibonacci sequence is used to find out the movement of the trend lines and the highest and the lowest price points. Fibonacci Retracement, Fibonacci Extensions, Fibonacci Projection and the Pivot Point are the applications of Fibonacci sequence.
It is not possible for any currency to always move in one direction that is either upward or downward. After travelling to some distance in the Forex chart, the price of any currency retraces back. This retracing of price is retracement. The Fibonacci Retracement is used to find different fib levels and these fib levels will work as support and resistance levels for any currency in the Forex market. Fibonacci Retracement can be drawn both in uptrend and downtrend and drawing of Fibonacci retracement is very easy. To construct Fibonacci retracement, draw a trend line between trough and peak. Trough and peak are the two extreme points. The retracement tool of Metatrader software then inserts three horizontal lines. This insertion work is done automatically.
What will be the behavior of a currency after it has touched swing high or swing low and moved? This is the main question traders and investors wish to get answer for in the situations of rising or falling market. Such behavior of any currency can be predicted using Fibonacci Extension. Ratios beyond 100% are used in Fibonacci Extension to predict such behavior by calculating Fibonacci Extension levels. These extension levels are very important for the traders and investors because they base their entry and exit points on these Fibonacci Extension levels. In an uptrend, profit should be made on long trades whereas in downtrend, profit should be made on short Forex trades.
Fibonacci price projection tool is used to predict a possible target for any currency and traders can use this projection for buying or selling securities. Traders can take help of this tool but should totally depend on this tool because sometimes these projections may go wrong. The accuracy of Fibonacci Projection tool depends on the level at which this tool is correctly applied. There are mainly two types of price projection techniques, the Internal Fibonacci Projection and the External Fibonacci Projection.
Internal Fibonacci Projection includes Fibonacci Retracement and External Fibonacci Projection includes Fibonacci Extension, Fibonacci Expansion and parallel or alternates.
It is the simplest but most effective trading strategy used by most technical analysts. Support and Resistance that the Pivot Point calculates are most effective. Pivot Point clearly indicates if the market is going low or high. There are many methods to calculate Pivot Point and one the most famous method is the five-point system.
This step gives a clear idea of all the Fibonacci strategies used to find support and resistance levels, behavior of a currency after swing high or low is crossed and predict a possible target for any currency. Traders and investors should use these tools if they want to make profit in both rising and falling market.