{"id":60439,"date":"2012-08-20T10:20:17","date_gmt":"2012-08-20T00:20:17","guid":{"rendered":"http:\/\/www.fnarena.com\/index.php\/2012\/08\/20\/trading-trends-with-fibonacci\/"},"modified":"2012-08-20T10:20:17","modified_gmt":"2012-08-20T00:20:17","slug":"trading-trends-with-fibonacci","status":"publish","type":"post","link":"https:\/\/staging.fnarena.com\/index.php\/2012\/08\/20\/trading-trends-with-fibonacci\/","title":{"rendered":"Trading Trends With Fibonacci"},"content":{"rendered":"

\n\tBy James Stanley, Trading Instructor, FXCM<\/span><\/p>\n

\n\tTraders are constantly confounded by the conundrum of when to enter a position during a trending market.<\/p>\n

\n\tEnter too early and run the risk of your stop getting hit before the trend continues its movement in your favor.<\/p>\n

\n\tEnter too late – and you risk missing the move altogether; opening the position as the currency pair accelerates further only to find that by the time you entered price was due to make another retracement. Much like trying to catch a train after it had already left the station, the results can be disastrous.<\/p>\n

\n\tThis article will discuss one of the more popular ways that traders look to identify comfortable entry points when trading a trend. This procedure can help traders buy up-trends cheaply, and sell down trends expensive – and it is all based on the mathematical study of Fibonacci.<\/p>\n

\n\tHow to Apply Fibonacci<\/strong><\/p>\n

\n\tTraders looking to apply Fibonacci want to first locate the trend that they are looking to trade. As is the case with many other permutations of technical analysis, the longer time frames will generally offer a greater degree of efficacy due to the larger sample sizes, and the fact that more traders may be making similar observations. So, the first step in applying Fibonacci is to identify the most recent major move with which a trader is looking to trade. The chart below will show how traders might look to do this with a recent EURUSD Daily chart:<\/p>\n

\n\t\"\"<\/p>\n

\n\tNow that the trend the trader wants to trade has been identified, the Fibonacci retracement can be added to the chart with the trader’s charting software.<\/p>\n

\n\tThe picture below will illustrate how Fibonacci could be drawn on the above chart. Notice the green edged box from above; the below picture will show this portion of the chart in much greater detail:<\/p>\n

\n\t\"\"<\/p>\n

\n\tFibonacci Retracement Levels<\/strong><\/p>\n

\n\tThe prominent feature of Fibonacci is the series of retracement levels that are offered as potential support and\/or resistance.<\/p>\n

\n\tOnce applied, intervals will be applied to the chart – and traders could look to these prices to function as resistance (for down-trends) or support (for up-trends).<\/p>\n

\n\tThe most popular Fibonacci interval speaks directly to the study of Fibonacci, and is linked to the ‘golden ratio,’ of .618. This interval is often interpreted as 61.8%; so from the trend that was just drawn – 61.8% up the trend-line will offer this price as a potential resistance level.<\/p>\n

\n\tFrom the 61.8% retracement levels, traders have taken the reciprocal of the golden ratio (1-.618) to find the next common Fibonacci retracement level of 38.2%.<\/p>\n

\n\tThe next two common levels are 76.4% and the reciprocal of this number 23.6%.
\n\tTraders will also commonly plot the 50% level – although that is not a true Fibonacci number. The picture below will outline these levels:<\/p>\n

\n\t\"\"<\/p>\n

\n\tEach of these levels are relative to the prior trend. If a trader is looking to enter at the 38.2% retracement, they are looking to trade in the direction of the original trend – when 38.2% of that trend has been retraced. The 76.4% retracement – the deepest of the levels outlined above – would come into play when more than ¾ of the original trend has been given back.<\/p>\n

\n\tTrading Fibonacci<\/strong><\/p>\n

\n\tNow that the trader has prices with which they can look to the re-ignition of the previous trend, the next step is to wait for price to hit these levels. When these levels get touched by price, that is when traders can look to enter trades in the direction of the original trend; once again – looking to buy up-trend cheaply or to sell down-trends expensive.<\/p>\n

\n\tIn the EURUSD example above in which Fibonacci has been applied, traders can look to sell if resistance forms at any of the pre-defined levels. The chart below will illustrate further:<\/p>\n

\n\t\"\"<\/p>\n

\n\tNot All Levels are Created Equal<\/strong><\/p>\n

\n\tOne of the first things traders will notice when trading with Fibonacci is that not all levels will furnish support and\/or resistance at the pre-defined prices and intervals.<\/p>\n

\n\tBecause of this, it is advisable for traders to wait until support and\/or resistance forms at these levels before trading them.<\/p>\n

\n\tOnce support or resistance forms, traders can look to trade in the direction of the original trend – with a stop-loss order just above resistance (or below support in the case of up-trends).<\/p>\n

\n\t— Written by James B. Stanley<\/p>\n

\tPublished with the permission of FXCM. The views expressed are not necessarily those of FNArena's (see our disclaimer).<\/em><\/p>\n

\n\tFor real time news and analysis, please visit http:\/\/www.dailyfx.com\/real_time_news<\/em><\/p>\n

\n\tDailyFX provides forex news on the economic reports and political events that influence the currency market. Learn currency trading with a free practice account and charts from FXCM.<\/em><\/p>\n

\n\twww.dailyfx.com<\/em><\/p>\n

\n\tDisclaimer<\/strong><\/em><\/p>\n

\n\tForex Capital Markets is headquartered at Financial Square 32 Old Slip, 10th Floor, New York, NY 10005 USA.<\/u><\/em><\/p>\n

\n\tTrading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before you decide to trade the foreign exchange products offered by Forex Capital Markets, LLC, Forex Capital Markets Limited, inclusive of all EU branches, FXCM Asia Limited, or FXCM Australia Limited, any affiliates of aforementioned firms, or other firms under the FXCM group of companies [collectively “FXCM<\/span> Group”] you should carefully consider your objectives, financial situation, needs and level of experience. If you decide to trade foreign exchange products offered by FXCM Australia Limited you must read and understand the Financial Services Guide and the Product Disclosure Statement. FXCM Group may provide general market information and commentary which is not intended to be investment advice and the content of this email must not be construed as personal advice. By trading, you could sustain a total loss of your deposited funds and therefore, you should not speculate with capital that you cannot afford to lose. You should be aware of all the risks associated with trading in foreign exchange products. Foreign exchange products are only suitable for those customers who fully understand the market risk. FXCM recommends you seek advice from a separate financial advisor.<\/em><\/p>\n

\n\tFXCM Group assumes no liability for errors, inaccuracies or omissions in these materials and does not warrant the accuracy or completeness of the information, text, graphics, links or other items contained within these materials. FXCM Group shall not be liable for any special, indirect, incidental, or consequential damages, including without limitation losses, lost revenues, or lost profits that may result from these materials. This email is not a solicitation to buy or sell currency. All information contained in this e-mail is strictly confidential and is only intended for use by the recipient. All e-mail sent to or from this address will be received by the FXCM corporate e-mail system and is subject to archival and review by someone other than the recipient.”<\/em><\/p>\n

\n\tTechnical limitations<\/strong><\/p>\n

\n\tIf you are reading this story through a third party distribution channel and you cannot see charts included<\/span>, we apologise, but technical limitations are to blame.<\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"

Market analysts at FXCM explain the mathematical study of fibonacci numbers and show how traders can apply such analysis.<\/p>\n","protected":false},"author":9,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[7],"tags":[],"acf":[],"_links":{"self":[{"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/posts\/60439"}],"collection":[{"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/users\/9"}],"replies":[{"embeddable":true,"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/comments?post=60439"}],"version-history":[{"count":0,"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/posts\/60439\/revisions"}],"wp:attachment":[{"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/media?parent=60439"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/categories?post=60439"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/tags?post=60439"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}