FX TECHNICAL ANALYSIS
calculated by taking two extreme points (the swing high and swing low) on the price movement and dividing the vertical distance by the key Fibonacci
ratios.
Once these levels are identified, horizontal lines are drawn and used to identify possible support and resistance levels. The direction of the prior trend is likely to continue once the price has retraced to any of the ratios.
Chart.1 Fib retracement
• They should always be plotted on the wicks of the candles and not on the real body.
• On the other hand, if we are looking for
support/resistance
levels of any Fibonacci ratio, we should consider the close of the real body of a candle. (Example: if we plot the Fibonacci retracement ratio and we see that price finds support at the 61.8% Fib level; A candle wick can go below the Fibonacci 61.8 level, but we cannot have a close of the real body below this level, or the support is invalidated).
Having established the basic rules, let us have a detailed look at the different Fibonacci ratios.
Fibonacci Retracements
Price always moves in waves and we can use the Fibonacci retracement levels to identify possible levels of
24 FX TRADER MAGAZINE April - June 2013 Chart.2 Fib projection
support/resistance. Retracements occur when a given market is rapidly heading in a certain direction. The market retracts as traders tend to take some profits. This retraction represents a good time to re-enter the market, since the levels will be very appealing before the market starts growing again.
The Fibonacci retracement is
The basic use of Fibonacci retracements is to find potential levels of support or resistance “behind” the market.
If the
market is moving up and making new highs, Fib retraces will draw levels BELOW the current price. The standard ratios used in the Fibonacci retracements are: 38.2; 50.0; 61.8 and 78.6.
Ideal situation: Price in an existing trend, and we are looking to rejoin the trend after a pullback.
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