This is the second article in our Fibonacci Ratios series. If you haven’t already we suggest that you check out the first article about the Fibonacci Application. In that article, we covered the background of Fibonacci Ratios, or the “Fibs”, how they are calculated, and how they look on a chart. Ralph Nelson Elliott and W. D. Gann used these ratios in their various analyses, and traders use these ratios to predict with uncanny accuracy future levels of support and resistance in the forex markets.
Fibonacci Ratios, or the “Fibs”, can be used in a variety of ways. Metatrader offers many options from lines, to fans and channels, but the most popular use is to determine what are called lines of retracement, those levels where a wave ebbs and flows to form support and resistance. After designating the beginning and ending points of a previous trend, the tool creates a series of lines where future expectations are highest, and traders can then plan their trading strategies accordingly.
How to Read a Fibonacci Chart
The Fibonacci Ratio overlay is presented on the above “15 Minute” chart for the “AUD/USD” currency pair. In the example above, the series of “Red” lines are the Fibonacci Ratios calculated, based on the two points connected by the “Red” dotted line. The “Green” ovals have been added to emphasize the accuracy of the predicted levels of support and resistance.
Traders use the Fibonacci application to anticipate key points of reference for both upward and downward trends in order to prepare various long and short position trades and to place various stops along the way. The application works best when common levels are determined for a trend in multiple timeframes, thereby suggesting a convergence with a higher probability. The use of Fibonacci Ratios can also be enhanced with pattern recognition and an appropriate momentum oscillator.
As with any technical indicator, a Fibonacci Ratio overlay will never be 100% correct. False signals can occur, but the positive signals are consistent enough to give a forex trader an “edge”. Skill in interpreting and understanding Fibonacci signals must be developed over time, and complementing the Fibonacci tool with another indicator is always recommended for further confirmation of potential trend changes.
In the next article on the Fibonacci Ratios application, we will put all of this information together to illustrate a simple trading system using the “Fibs”.
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