Fibonacci Technical Analysis Overview

by Harald Reno - Date: 2010-10-05 - Word Count: 721 Share This!

There is a unique ratio that could be used to describe the dimensions of just about everything from nature's tiniest building blocks, for instance atoms, on to the most advanced designs within the universe, including remarkable large celestial systems. Nature relies on this particular natural proportion to preserve balance, but the money markets also seem to operate according to this 'golden ratio'.

Mathematicians, scientists, and biologists have known this ratio for years. It's based on something recognized as the Fibonacci sequence, named after Italian originator, Leonardo Fibonacci. Each term in this sequence is basically the sum of the two earlier numbers (1, 1, 2, 3, 5, 8, 13, etc.) But this sequence is not all that important; rather, it's the quotient derived from the adjacent numbers that have a remarkable proportion, roughly 1.618, or its inverse 0.618. This particular proportion is referred to using a number of names, the most common of which is the golden ratio. Thus, precisely why is this number so significant? Well, almost every thing features dimensional attributes which conform to the ratio of 1.618, so it seems to possess a fundamental purpose with regard to the building blocks of Mother Nature.

When utilized in Fibonacci technical analysis, the golden ratio is usually converted into three percentages: these are - 38.2%, 50% and 61.8%. However, more multiples are possible when required, such as 23.6%, 161.8%, 423% and so on. There are four main techniques for implementing the Fibonacci sequence to currency trading: time zones, fans, arcs and retracements.

Fibonacci analysis has become an essential tool for the modern investor. Some traders may be cynical concerning the unique and somewhat fuzzy way Fibonacci analyzes the market though eventually almost all an investor needs to be aware of is whether it is dependable and accurate. The unqualified reply to this query is absolutely yes and this is why Fibonacci analysis has become one of the most well-known signals accessible to Forex traders.

The Fibonacci sequence should technically have absolutely no impact to buying and selling arena, however, it does indeed. This is generally believed to be because so many traders use Fibonacci analysis and follow the projections it comes up with.

This leads to the great majority of Forex traders to make decisions based on the evidence presented by Fibonacci technical analysis and consequently the market will move to the direction implied through the analysis.

Basically, Forex traders all over the world tend to follow the rules set out by Fibonacci analysis and this triggers the market to shift in the predicted directions anyway which ultimately makes Fibonacci analysis a type of self-fulfilling prophecy.

The factors behind the correctness and reliability of Fibonacci technical analysis is largely irrelevant because just about all a trader requires is to possess faith and be dependent on the consistent and dependable history of this analysis.

Whenever deployed properly Fibonacci technical analysis predicts significant lines of support and resistance of any investment under consideration. The retracements and extensions are laid over the top of the candlestick chart and if carried out accurately the support and resistance are plainly seen. The price of the investment is likely to either rebound when it strikes one of these lines or go beyond it and if it breaks the support or opposition it is most likely to keep on moving. This is valuable knowledge for an investor. Using Fibonacci analysis huge earnings could be created by playing the marketplace with this information.

If a trader is analyzing the current price of an investment they may utilize support and resistance lines, as projected by the Fibonacci analysis, to form a variety of market strategies.

For instance if there is a powerful line of support an investor should place a pending purchase using the intention that the cost reaches that purchase and rebounds and makes profit. If the cost smashes the support a trader should place a stop loss to ensure that no substantial amounts of money is lost.

On the other hand a trader could spot a pending buy above a resistance line. This could make sure that if the cost breaks the resistance the buy is going to be initiated and it is most likely the price will continue on climbing. You will find a variety of similar versions to this method an investor can make the most out of Fibonacci technical analysis.

Related Tags: currency trading, forex trading, technical analysis, fibonacci technical analysis, fibonacci analysis

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