Trading CFDs carries considerable risk of capital loss. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74-89% of retail investor accounts lose money when trading CFDs. You should consider whether you can afford to take the high risk of losing your money.
The Fibonacci retracement is a very useful tool used by traders to predict the future price movement of any financial asset or to estimate the most likely support / resistance points.
The retracement was conceived by Leonardo Fibonacci in the 12th century. Fibonacci created the famous and well known golden rule. The retracement says that a wider price movement will retrace a certain percentage before continuing in the original direction. The average of these percentages is 61.8%. This number is the basis of the so-called golden rule.
If you trace a line starting from the top price reached by the exchange rate up to a low price level, then this distance represents the base of the movement on which the retracements will be calculated.
You can use the Fibonacci rule on different time frames. Obviously, the longer is the considered time and the more signals are reliable.
After finding the top and low points, you will need to trace the Fibonacci line in the direction of the movement. The move that needs to be made to trace the line must go from the top to the bottom if the trend is bearish and from the bottom to the top if the dominant trend is bullish.
The 50% of the retracement means that the price retraces the line of the major trend for an amount equal to 50%. There are other lines and other proportions that are automatically processed by graphics software: 38.2%, 61.8% and 78.6%.
There are several ways to trade with Fibonacci.
The most classic one is to enter the market (or exit if you are already open) at a price placed on one of the lines of retracement, almost as if that threshold represented a magic barrier on which all traders were lingering.
The following chart shows us how AudUsd, after the fall started in 2014, is finding tremendous difficulty in getting out of that band of resistance represented by the 38.2% of Fibonacci retracement.
Another example with UsdJpy. After the rise started in 2011, the exchange rate from 2015 has begun to flex and the first concrete downward hesitation was on the 38.2% of retracement of the whole bull market. After breaking this level downward (that became a resistance afterwards), the next support was once again a Fibonacci level, the 50% of the whole rise.
The Fibonacci indicator, however, cannot be used as a single trading tool, as for all the other indicators. It’s much better looking for confirmations from other indicators as well as prices.
Still AudUsd. This time the chart is monthly and it is now possible to appreciate how the long-run bull market has retracted the 61.8% of the whole rise exactly at the bullish trend line. The golden ratio combined with the classical technique analysis: an explosive mix that could support the rise of AudUsd over the next few years? Well, we’ll see, but certainly these examples has given us an idea of how the brilliant idea of the Italian mathematician has revolutionized the trading sector too. But there is much more when we refer to Fibonacci, apart from the retracements. Many other kind of technical measurements can be used, from projection to arches, from fan line to the so-called time zones, all matters that each trader should know to have a great working tool available for each financial asset subjected to technical analysis.