Fibonacci Indicator

The image above shows a moderately short trend which is the kind of trend that we will focus on for the Fibonacci trading technique. The trend is made up of three parts, two going up and one going down. Since the overall direction of the trend is up, the middle part, where there is a momentary downfall, is called a ‘pullback’. The problem is that when we see a trend start to reverse it is very hard to establish if we are witnessing a pullback or a reversal of the trend. This is where Fibonacci trading comes in. This technique allows us to analyze the data and make a decision.

To learn more about using trends to determine trades: Trend Trading – Forex Trading Strategies

The Fibonacci numbers and ratios have been famous among mathematicians and artists for hundreds of years. They represent many things in nature and in financial markets and can be used as great analytical tools. No math is required to use these numbers as the trading platforms do all the calculations for us. All that we must do is make a decision based on the lines which appear on the graph.

The three most important Fibonacci numbers are 0.382, 0.5, and 0.618. Also, keep in mind 0.764 and 0.236.

The Fibonacci ratios are the purple lines drawn on the chart above. By examining how far the pullback has reached on the Fibonacci scale we can determine whether the price will pull back up again or turn into a bearish trend. As long as the price remains above the 61.8% line we can expect the trend to rise back up, indicating a pullback. Once the price crossed the 61.8% line we must treat it as a start of a bearish trend which would indicate that it is time to close the position. For example, the chart above the pullback forms a bottom at around the 50% Fibonacci marker. This indicates that the price will most likely rise and the overall upward trend will continue.