Forex Technical Analysis: Introduction to the Golden Section (Fibonacci).
What is Fibonacci?
In our trading process, we will widely use Fibonacci ratio, so you better learn this knowledge and love it like your mother’s cooking. Fibonacci is a very broad subject. There are already many research fields related to Fibonacci, but we will study in the following two aspects: Fibonacci retracement and Fibonacci extension.
First, let us introduce Mr. Fibonacci-Leonardo Fibonacci. He is not a well-known chef, in fact, he is a famous Italian mathematician.
He was the first person in the West to study Fibonacci numbers, and introduced the modern system of place-value representation of written numbers and multipliers to Europe.
The most basic formula for the golden line is to divide 1 into 0.618 and 0.382.
They have the following characteristics:
(1) Any number in the sequence consists of the sum of the first two numbers;
(2) The ratio of the previous digit to the latter digit tends to a fixed constant, which is 0.618;
(3) The ratio of the last digit to the previous digit is close to 1.618;
(4) 1.618 and 0.618 are reciprocal, and the product is approximately equal to 1;
(5) If any number compares with the last two numbers, its value approaches 2.618; if compares with the first two numbers, its value approaches 0.382.
Fibonacci retracement levels are: 0.236, 0.382, 0.500, 0.618, 0.764
Fibonacci extensions are: 0, 0.382, 0.618, 1.000, 1.382, 1.618
Traders use the Fibonacci retracement as a potential support and resistance area. In view of the fact that so many traders are paying attention to these points and placing buy or sell orders near these points to enter the trade or set stops, support and resistance levels have become self-fulfilling fables.
Traders also use Fibonacci extensions as profit taking levels. Like the Fibonacci retracement level, there are also a large number of traders who are paying attention to the Fibonacci extension level, and regard these prices as the key price points for setting buy and sell orders, with the purpose of profit-taking. A tool is used more frequently, not just because of the realization of self-expectation.
Most graphics software includes Fibonacci retracement and Fibonacci extension.
In order to use the Fibonacci water level as our analysis tool in the graph, first of all, we must clearly have two candlesticks with a high band and a low band in a specific interval.
The candle line with the high point of the band is on the left and right sides of the candle line. There must be at least two candle lines with a lower high point than the candle line.
The candle line with a band low is that there are at least two candle lines with higher lows than the candle line on the left and right sides of the candle line.
Do you understand it? Don’t worry, we will explain in detail the knowledge of retracement, extension, etc., and more importantly, we will introduce in a few lessons how to use the Fibonacci tool for profit.