Power of Fibonacci Indicators Guide – When we arrange an infinite sequence of natural numbers that has the foremost term as the sum of the previous two terms of the series (0, 1, 1, 2, 3, 5, 8….), it is called Fibonacci Series. It was originally examined in Europe in 14th century, but it seems that the Indians and the Arabs knew this series before that. There is no denying the fact that this series has a resemblance to a number of natural phenomenon and at the level of sub-atomic physics, and that most of the mathematicians are busy in studying the theory to usher a new era of innovated discoveries.
Apart from the natural processes that incorporates this theory; it is also quite a useful tool for studying the market behavior and the price action. The main concern is the forex trading of indicators in which the market follows the predictions of this series when it is applied to the certain dynamics of the market and the existing price action trends.
The Golden Ratio.
When the traders are hopeful in using the Fibonacci Series to decide the marketing trade, the numbers alone are not of much use. In spite of that the traders use the ratio of the numbers in order to know certain basic things like extension of trends, retracement levels and resistance levels of the prices. The Golden ratio is the root for all the derived ratios which is nothing but basically the limit of the ratio of 2 successive numbers in the series. For example, after subtracting the ratio 5/8 and 8/13 which have the approximate values of respectively 0.62 and 0.61, we get 0.38 that is also the ratio between two numbers in the same series like 3/8 (0.375) or 5/13 (0.38). We see that the ratio of the numbers in Fibonacci series tend to converge as the series progresses.
In the above Fibonacci series, we see that
8/13 = 5/8 = 3/5 = 2/3 = 0.61 that usually approaches the ideal Golden Ratio, 0.6180339887, when the series progresses.
Overview of the Fibonacci Indicators.
The question arises here that how we use the Fibonacci Series in the analysis of the market, and forex? It has basically been seen that the supporting resistance levels in the market are examined by the Fibonacci ratios, keeping in mind the trend pattern and developing range.
For example, suppose 3x is the length of the first leg then the retracement will assume the value of 0.38*3x or 0.61*3x. In the same way, the extension may be at 5x or 8x as the series expects (….3, 5, 8….). This is the principle for all the Fibonacci indicators.
Featured Fibonacci Indicators:
This indicator is mainly used to determine the retracement levels of the existing trend in a market. 038 and 0.61 are the two main ratios although 0.50 is also used sometimes. The trader is assumed to note the levels that are nothing but the multiplication factors of the corresponding price trend and he knows the approximate potential support levels. For example, movement of the price from 1.3 to 1 in the main leg, 0.3*0.61 = 0.183 and 0.3*0.38 = 0.11 will be the next retracement levels. 1.3-1 is the length of the main movement.
This indicator is also used for the same purpose and the same process is implied to calculate the marketing trend of a particular pattern. In other words, it is used to calculate resistance levels and the extension levels that are really helpful in reversing the trend. For example, we need to multiply the first leg by 0.3 to Fibonacci ratios like 1.38 and 1.61 to know the correct resistance level.
Fibonacci Time Series
This time series is analogous to the Fibonacci series in a given timeframe. After choosing a developed pattern from the past, we prefer the beginning of long term pattern. For example, picking a head and shoulders pattern as the first leg and then apply a time series. Suppose in 2x days, we are applying the time series, subsequent triangle is ought to develop over a period of 3x days getting the belated 5x days from the given sequence of the Fibonacci series of time. The main underlying principle behind this series is that the time period developed by each phase must be determined by Fibonacci Sequence.
The software of trading is ought to all the above predicted calculations and this might seems to discourage you because the process is a little bit complicated. Although it is very easy to determine because you may draw a certain Fibonacci levels on a forex chart.
It should be a well known fact that the market trading action is quite chaotic in nature and since Fibonacci series is purely a mathematical concept it is sensible to hope for certain prognostications at all the correct times. Also, it is quite beneficial to determine potential reversal or reaction points or the points may be concluded where we may join or leave the market pattern. Most of the traders are using these Fibonacci indicators all over the world because it is simple and is quite helpful in making trading decisions.