eMarkets liquidity provider
B2C and B2B solutions

Alpari (UK)

  German
  Arabic

• Video Tutorials
  • Intro
  • MetaTrader 4: Tips and Tricks
  • MetaTrader 4: Trade Window
  • MetaTrader 4: Platform Management
  • MetaTrader 4: Indicators and EAs
  • Systematic: Quick Start
  • Systematic: Selecting Your Systems
  • Systematic: Money Management
  • Systematic: Account Management
  • Alpari Research: Technical Reports
  • What is Forex and How Does It Work?
  • Pair Characteristics
  • Introduction to Charting
  • Introduction to Technical Analysis
  • Risks
  • Using Technical Indicators
  • Introduction to Fundamental Analysis
  • Gold and Silver
  • Money Management
  • Position Sizing
  • Understanding and Trading the News
  • Earning Interest in Forex
  • Introduction to Fibonacci Analysis
  • Economic Indicators
• Autochartist
  • Intro
  • Download Autochartist
  • Autochartist Tutorials
• Market Analysis Guide
  • Intro
  • Technical Analysis Guide
  • Bill William’s Chaos Theory
  • Japanese Candlesticks Theory
• Glossary

Introduction to Fibonacci Analysis

Fibonacci analysis is a technical method for forecasting levels of support and resistance and projecting price targets. It can be used to set stops as well as timing entries, however, the most valuable information is what it can tell us about risk. 

What are the ratios and how are they used?
 
I will spare you the long, historical explanation of where the Fibonacci ratios come from and how it appears in the natural world. If you are really interested there are plenty of resources on the Web that explain the technical aspects of the Fibonacci Sequence.
 
Fibonacci Analysis applies mathematical sequences to charting analysis. Fibonacci studies are available in the MetaTrader 4 charts. While there are many Fibonacci ratios, in our experience, it is sufficient to stick with the standard levels of 23.6%, 38.2%, 50%, 61.8%, 100% and 161.8%.

Where do the lines go?
 
The sticky part of fundamental and technical analysis is that they are both very subjective, which means that they allow for a great deal of interpretation and individual preference. However, Fibonacci analysis can help manage that subjectivity by applying absolute lines.
 
Fibonacci studies use a historical trend to help identify future levels of support and resistance. In the example below you can see a Fibonacci retracement drawn from the “top” of the market in July to the “bottom” of that trend in September where prices started to move back up. Fibonaccis are always anchored to a top and bottom of a trend.
 
You can see that the fibonacci level of 38.2% correctly identified a potential resistance area. This was a great way to identify the starting point for a continuation for the previous trend.


 
In the next chart you will see that once a new trend emerged, the Fibonacci study was moved to the next trend and the fibonacci projection levels (161.8% and 261.8%) proved to be predictive in finding the next support levels.
 

 

Bodies or shadows?
 
There is always a minor debate about whether you should anchor your Fibonacci retracement to the body of a candle or the shadows. We prefer to use the shadows so that the study includes the extremes of market sentiment. Most of the time, the difference is insignificant but sometimes it can make a difference. Both are valid ways to apply the study and a little experience can help you decide which is best for you.

Think of the lines as being very thick
 
We feel that support and resistance is more often an area around the Fibonacci lines than a specific to-the-pip point in the charts. You will find that prices move around a support or resistance line, especially during a consolidation. Discounting that level because of a temporary break may lead you to ignore a valid signal in the future. Give the market some room to move around the fibonacci support, resistance and target lines.

Provided by Learning Markets

© 2004-2010 Alpari (UK), LTD