Fibonacci ratios are excellent tools for Forex trading, and in this guide we will make clear what most traders find complicated.
First, let's try to understand what Fibonacci ratios are. Fibonacci numbers are named after the Italian mathematician that found them. Each Fibonacci number consists of the summation of the previous two numbers. These numbers are: 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, etc… This way 3=2+1, 5=3+2 and so on.
Not including the first few Fibonacci numbers, the ratio of a Fibonacci number to the following one is always 0.618. For example, 89/144=0.618. The ratio between two alternate Fibonacci numbers is 0.382. These ratios are referred to as the golden mean, or divine ratio. These are one of the Fibonacci retracement levels and extension levels.
Fibonacci retracement levels are used for calculating support and resistance levels, and Fibonacci extension levels are used for calculating profit taking levels.
Almost every Forex trading software includes automatic Fibonacci retracement and extension levels calculation. In order to use Fibonacci levels in your charts, you'll have to identify Swing High and Low points. A swing high is when a certain price is surrounded by at least two lower highs. A swing low is when the price is surrounded by at least two higher lows. Forex trading highs and lows can be viewed using either bar charts or candlestick charts.
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