- Anyone running a Forex trading business needs to be aware of the benefits of using Fibonacci retracements as part of their strategy.
Are you trying to run a business based on trading currencies? This is an ambitious business idea that is worth pursuing if you know what you are doing. However, you are going to have to educate yourself about the best Forex practices if you want to create a successful business in this field.
It is estimated that between 70% and 90% of forex traders fail. If you want to succeed, you have to know what you are doing.
One of the best strategies that you can try when running a Forex business is using Fibonacci retracement. Keep reading to learn more.
What Forex Business Owners Need to Know About Fibonacci Retracements
You need to know what forex trading strategies to follow when running a Forex business. You also need to think about this if you are trading forex as another business owner trying to build capital.
Fibonacci retracement is a favored tool among technical traders based on the Fibonacci sequence of numbers. The sequence is created by adding the previous two numbers, starting with 0 and 1. The resulting numbers are then used to create Fibonacci ratios that traders can apply to charts to identify potential support and resistance levels. Several different forex strategies make use of Fibonacci retracement levels.
Support and Resistance Levels
One of the most common ways that Fibonacci retracement levels are used is to help identify potential support and resistance levels. The theory is that after a price move, the market will retrace a portion of that move before continuing in the original direction. By identifying these Fibonacci levels, traders can better anticipate where the market may find support or resistance.
Fibonacci Retracement Levels
Fibonacci retracement levels are horizontal lines drawn on a price chart at key Fibonacci ratios. These ratios are found by taking any two consecutive Fibonacci numbers and dividing the larger one by the smaller one. The most important Fibonacci ratios for retracements are 23.6%, 38.2%, 50%, and 61.8%. These ratios can be used to identify possible areas of support and resistance.
Fibonacci Expansion Levels
Fibonacci expansion levels are similar to Fibonacci retracement levels, except they are drawn above the recent high instead of below the recent low. These levels are used to identify possible areas of resistance. The most important Fibonacci ratios for expansions are 100%, 161.8%, 261.8%, and 423.6%.
Fibonacci Time Zones
Fibonacci time zones are vertical lines plotted on a price chart at intervals based on the Fibonacci sequence of numbers. The most common time intervals are 1, 2, 3, 5, 8, 13, and 21 days. Fibonacci time zones are used to identify possible areas of support and resistance.
Fibonacci arcs are curved lines drawn on a price chart at key Fibonacci levels. These levels are found by taking any two consecutive Fibonacci numbers and dividing the larger one by the smaller one. The most important Fibonacci ratios for arcs are 38.2%, 50%, and 61.8%.
Fibonacci Retracements vs. Fibonacci Extensions
Fibonacci retracements and extensions are two of the most popular tools among technical traders. Both tools are based on the Fibonacci sequence of numbers and can be used to identify potential support and resistance levels. The main difference between them is that Fibonacci retracements are drawn from the recent high to the recent low, while Fibonacci extensions are drawn from the recent low to the recent high.
Using Fibonacci Retracement Levels in Forex Trading
There are several ways that Fibonacci retracement levels can be used in forex trading. One common way is to use them as potential support and resistance areas. In addition, traders can use them as targets for take-profit orders. Fibonacci retracement levels can also be used to determine stop-loss levels.
Using Fibonacci Expansion Levels in Forex Trading
Fibonacci expansion levels are similar to Fibonacci retracement levels, except they are drawn above the recent high instead of below the recent low. These levels can be used in many ways, including as potential areas of resistance and targets for take-profit orders.
Other Ways to Use Fibonacci Levels in Forex Trading
In addition to the methods mentioned above, Fibonacci levels can also be used to identify possible turning points in the market. These levels can also be used with other technical indicators to generate trade signals.
Risks of using Fibonacci retracements
A false breakout is when a price breaks out of a Fibonacci level, only to reverse and move back into the previous range. False breakouts can occur at any Fibonacci level, but they are most common at the 23.6%, 38.2%, and 50% levels.
Failure to catch the entire move
Fibonacci retracements will not always catch the entire move. In some cases, the price may continue moving toward the breakout without retracing back to a Fibonacci level. It can often occur when there is a strong trend in place.
Getting caught in a whipsaw
A whipsaw is when the price moves aggressively in one direction, only to reverse and move back in the opposite direction. It can often occur at Fibonacci levels, especially when they are close.
Which strategy to use?
Which strategy you want to use in your analysis of Forex charts depends entirely on what your trading goals are. Before you make a move and put your hard-earned money at risk, you should ask yourself the following:
- What am I hoping to get out of this trade?
- How long will I open this trade for?
- What is my maximum risk limit?
- Do I have the knowledge and skills to execute this strategy?
These questions make good starting points for those who are unsure about whether or not to use the Fibonacci retracement, as it can certainly be more complex than it looks.
Always Follow the Right Strategies When Running a Forex Trading Business
There are a lot of things that you have to keep in mind when running a business as a forex trader. You will want to know about the benefits of Fibonacci retracements and other strategies.