Introduction to Fibonacci Trading
No matter what kind of trader you turn out to be, you need to use Fibonacci trading as a major part of any strategy. People like to combine different indicators and time frames to find their ideal strategy, but the Fibonacci tool is used with nearly all of those strategies to make them even more powerful.
What is the Fibonacci Sequence?
The Fibonacci (or Fib) sequence is a mathematical equation that involves taking a number, and the number that preceded it to produce the next number. It starts like this: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34
Each number in the sequences is the corresponding two numbers behind it added together. As you get further down the line, you will notice that the number preceding the latest number is always 0.618% of the preceding number.
In other words, if we continued going down the line with the Fib sequence, you would see that 34 is 61.8% of 55 which is 61.8% of 89, and so on. This constant is what is used to create the Fibonacci sequence of tools that are used in Forex trading.
Traders use these sequences to try to isolate where the best entry points are for their various trading strategies. It tends to work out brilliantly for them because it produces these unique points that they can rely on for their trading. They know exactly where to aim with their latest trades, and they can set their entry or exit points just above or just below the Fibonacci retracement levels.
How to Use the Sequence Effectively in Fibonacci Trading
The Fibonacci sequence is always meant to be used in combination with other indicators. However, it is perhaps the most powerful of the indicators simply because it gives you precise points that you are going to use to set your trades.
The Fibonacci sequence doesn’t necessarily say if the currency is headed up or down (you will want to use other indicators to try to determine that), but it does tell you where you might want to set some entry and exit levels.
People who use it with their other indicators can get a better idea of how they should position themselves in the trade to get exactly as many pips as possible out of the trade.
The levels on the Fibonacci sequence that you want to pay particular attention to are the 0.618 level and the 0.236 level.
These are levels that tend to be major areas of support or resistance. Depending on which way you are playing the trade will determine which level you should use for your entry or exit point.
However, the main point of this is to say that you need to look at those support and resistance levels as the ideal place to lay down some trades and try to move your money.
Remember That Others Are Doing The Same
One of the trickiest things about the Fibonacci sequence is that there are so many other traders who are all using the same tools as you at the same time.
It can be extremely challenging and frustrating to get knocked out of a trade near your Fibonacci level because some other trader saw the same opportunity that you did and also took advantage of it. It happens all the time, and that is why you should try to set your trades just outside of the Fibonacci levels that you have drawn on your chart.
This should help you steer clear of some of these log jams.
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