When it comes to technical analysis, there are several different techniques that can be used. One such technique is Fibonacci Retracement Technique. The Fibonacci Retracement Technique is primarily based on the use of Fibonacci numbers to determine when there is going to be a trend reversal in the forex market. Fibonacci numbers were given by an Italian mathematician Leonardo Fibonacci and consist of a series of numbers which can be said to describe the proportion of things in the universe.
In a Fibonacci series, the first and the second term of the series are one and the next terms are determined by adding the preceding two numbers. The unique thing about the Fibonacci series is that the ratio of any number to the succeeding number is 0.618 and the ratio between the alternate numbers is 0.382. These ratios are known by the name of “golden mean”.
Now let us take a look at what this Fibonacci retracement technique is and how it can be used to determine the reversal in trend in the prices in the forex market. But, before we start we need to understand one thing. That one thing is that this method works only while the market is trending. The main principle behind this technique is that one needs to buy in the market when there is a retracement at the Fibonacci support level and one needs to sell when a retracement occurs at the Fibonacci resistance level. These retracement levels are generally denoted by ratios, which are 0.236, 0.382, 0.500, 0.618 and 0.764.
Let us now see how this technique can be applied in the real market. Suppose that a trader wants to transact in the forex market and plans to transact in the EUR/USD currency pair. For this he first of all plots the retracement levels in the candlestick chart that is representing the historical movement of prices of the pair in the market. This plotting is done using the swing high and swing low positions on the chart. Let us suppose that the swing high is represented by 0.7264 and the swing high is represented by 0.5955. Thus when retracement levels are plotted, they are plotted at 0.6955, 0.6764, 0.6609 and 0.6263.
Now if there is a retracement in the prices then these retracement levels would be tested and in case a trader is willing to buy in the market then he should buy at the retracement support levels. Also when the swing high is reached by the price in the market, then even if there is a retracement in the prices in the market the retracement would happen only to a certain level after which the price is expected to bounce back and will start moving upwards again.
Thus it can be very clearly seen that using the Fibonacci retracement technique can help you in determining when a support level is going to be reached. And once that support level has been identified one can very easily find out when is the best time to enter the market and make a profit.