One of the most popular trading strategies for professional forex trading brokers is the Fibonacci method. This method relies on the sequence of numbers that Italian mathematician Fibonacci discovered was at the root of many patterns in nature. The basic sequence starts with two 1s, and every number after that is the sum of the two right before it. For example, after 1,1, the sequence continues with 2, 3, 5, then 8, 13, and so on.
However, in forex trading, the Fibonacci sequence is used in theory only, not in specific numbers. The pattern of 1,1,2, etc, is not important; the idea of a pattern of numbers, wherein every number is the sum of the two preceding numbers, is. Fibonacci ratios in forex trading go something like .236, .50, .382, .618, and so on.
Why This Sequence?
Fibonacci observed that many things in nature as well as in the manmade world followed this pattern, and thanks to his work, we know why: it’s called an oscillatory pattern, and it’s one of those mysteries of the world that has proven throughout time to be a constant. It’s like gravity; something that we can count on because our world naturally aligns itself with this pattern. After many years of study, it’s been proven that forex charts follow this pattern very closely.
By understanding the pattern, traders use the Fibonacci strategy to predict the value of a currency in advance. They may not be able to come up with the exact cent of the price, but they can often get close enough as to know when would be the best time to enter or exit a trade. That’s a vital piece of information in forex trading.
Other Ways to Use the Fibonacci Strategy
This forex trading strategy goes beyond just defining entry and exit points. It can also help a trader decide how small or large a position to take in any given trade. Basically, it means that a trader can determine if they should play it safe, or risk a little more, on a specific trade. If the stop is predicted to be close to the resistance marker, the trader could safely take a bigger position without a lot of risk.
Money management is something that many beginning traders simply don’t have a great grasp of yet; by using this strategy to define “safe risks” in forex trading, it helps beginners learn how to best utilize what leverage they have, and manage their money wiser.
The Fibonacci strategy helps traders maintain discipline in other ways as well. Because forex trading is such a volatile market, a lot of traders are in for quick cash, and change up their strategies frequently in order to ride certain trends. Professional traders know that it’s usually far better to stick to a few long-term strategies. Once you’ve run a Fibonacci prediction on a specific asset, you can lock in your strategy for a long term run; stick with it, and you’re likely to see results overall.
Remember, though, that Fibonacci ratios are very subjective. The technique relies on the trader’s ability to identify those swing prices that have retracement potential. Because of this fact, using the Fibonacci strategy in forex trading isn’t an exact science; you still have to rely on your own experience and knowledge to fill in the data you need to run the sequence.
Some of the most historically successful traders have used the Fibonacci strategy to turn forex trading into their major payday. While it won’t always work, just like any other strategy, it’s one of the absolute best ways to move from a dabbler to a professional trader.
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