Fibonacci in Forex Trading

The Fibonacci series is used in a number of technical analysis techniques providing strong signals for trade. Traders dealing in derivatives, futures or currencies rely on these pointers to place buy, sell and stop loss orders. We will discuss the more popular Fibonacci technical analysis techniques such as Arcs, Fans and Retracements in this article. However, other technical tools such as Extensions, Clusters, Time Zones, etc are also based on the Fibonacci Series and can be used by traders to identify supports and resistances. Before going on to discuss the more frequently used Fibonacci analyses, we have summarized the Fibonacci function below. The various Fibonacci levels such as 38.2% and 61.8% are ratios between various members of the Fibonacci series.

Fibonacci Fans:
Most Fibonacci charting techniques consist of first identifying a trend. The high and low point of a sizeable period of trend is joined by a straight line. The period must be sufficiently long in duration to be considered a trend. Typically, these trend lines are usually drawn on candlestick charts.

For plotting Fibonacci Fans, the vertical distance between the high and low of the trend line is divided into Fibonacci proportions of 38.2%, 50% and 61.8%. Lines are drawn from the bottom of the trend line, connecting the Fibonacci points in the vertical. These lines serve as crucial supports and resistances for the time series. Two things must be kept in mind while using Fibonacci Fans (and in fact most Fibonacci charting techniques). First, the trend line must be kept updated with the most recent and detectable trend. Secondly, the trend line has to be placed suitably – any small change in the tilt of the line completely alters the Fans lines.

Fibonacci Arcs:
To draw Fibonacci Arcs, first a line is drawn between two swing points on the chart – a line between two distinct highs and lows. Once the trend line is plotted, arcs are drawn from one end of the line at the 38.2%, 50% and 61.8% levels. Although 50% is not a technical level, it is still widely used in most Fibonacci technical analyses because of the historically observed support or resistance that this level provides. These arcs serve as critical supports and resistances for the time series. For the graph shown in the illustration, it is clearly seen how these levels work efficiently as both supports and resistances. Once a support is breached, it now serves as a resistance. Traders frequently use Fibonacci Arcs to identify entry and exit signals. Quite often, it helps traders to limit losses and maximize profits.

Fibonacci Retracements:
Fibonacci retracements are similar to the Fans and Arcs. In case of simple retracement charts, the vertical distance between the high and low is divided into Fibonacci proportions – 61.8%, 50%, 38.2% and occasionally even 23.6%. The difference from Fans is that, while a Fan line is drawn from the end point of a trend line to the vertical (making angular sections), here the lines are horizontal. A retracement is defined as a movement away from the current trend, before the series continues to move in the original direction. The retracement lines provide potential resistances or supports for a retracement movement, as observed in the illustration below.

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