What is Fibonacci trading? Fibonacci trading is based on the famous Fibonacci number series. Whether you trade stocks, futures, commodities or currencies, you will find Fibonacci trading techniques highly useful. The good thing about learning the Fibonacci trading techniques is that once you master it in one market you can use it in other markets as well. Did you see the movie, The DaVinci Code? You will find a scene in the movie where the characters talk about the Fibonacci number as part of a clue or code of some sort.

So what are Fibonacci numbers? The Fibonacci number series were made famous by an Italian Leonardo de Pisa. The Fibonacci series starts with 0 and 1 and goes out to infinity with the next number in the series being derived by adding the prior two. For example, 0+1=1, 1+1=2, 1+2=3, 2+3=5, 3+5=8, 5+8=13, 8+13=21, 13+21=34, 21+34=55, 34+55=89, 55+89=144, 89+144=233, 144+233=377.

What is so fascinating about this series is that there is a constant found within the series as it progresses to infinity. The Fibonacci series is like this; 0,1,1,2,3,5,8,13,21,34,55,89,144,233,377,610, 987..to infinity. This constant is known as the Golden Ratio, Golden Mean or Divine Proportion.

Take any two consecutive numbers in the series after the first few and you will find the Golden Mean by dividing the higher number with the lower number. For example, 89/55=1.618, 144/89=1.618, 233/144=1.618, 377/233=1.618, 610/377=1.618, 987/610=1.618 and so on. The inverse of 1.618 is 0.618.

Identifying support and resistance is very important in forex trading or for that matter any other trading. How do you identify support and resistance? Fibonacci ratios are usually used by traders to identify support and resistance. What is most important to forex traders is that applying these ratios can help identify key support and resistance zone in the market and therefore determine key trading opportunities or setups. The Golden Ratio can also be found in many places in nature like flowers, shells, fossils etc.

Why use Fibonacci ratios in your trading? The application of Fibonacci ratios can give you the edge as a forex trader if you use the Fibonacci trading technique properly. We have already discussed the Golden Ration 1.618 and its inverse 0.618. The main ratios used in everyday analysis are 0.382, 0.50, 0.618, 0.786, 1.000, 1.272 and 1.618.

It is assumed that you have a computer, a market data source such as quote.com and a technical analysis program to manipulate that data since you are trying to look into a type of technical analysis. You should be proficient with the technical analysis program.

There are three types of Fibonacci price relationship namely, retracements, extensions and price projections (sometimes also called price objectives). We will look into each type of these relationships individually. The Fibonacci price analysis calculations can be done by hand as well but they are time consuming and tedious.

Support is when the buying pressure overcomes the selling pressure and the decline in the price is reversed at the support level. The definition of a support is the price area below the current market where you will look for a possible termination of the decline and where you would consider to becoming a buyer of whatever currency pair you are trading. Each of these Fibonacci price relationships will be setting up potential support or potential resistance in the chart that you are analyzing.

Support and resistance are two very important concepts used in trading. Resistance is price where the sellers overcome the buyers and the price starts to decline after reaching a high. It is the price area above the current market where you would look for the possible termination of a rally and consider being a seller. Fibonacci support and resistance levels as known as the leading indicators!

Mr. Ahmad Hassam is a Harvard University Graduate. He is interested in day trading stocks and currencies. Try These 1500 Pips A Day Forex Signals From Heaven. Know Forex Rebellion!

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