Fibonacci: a communication code for Forex traders

The Fibonacci series are one of the most used and profitable tools in the Forex markets. Technically, the series is identified by a sequence of numbers where each of them is the sum of the previous ones. A number divided by the previous one tends to approach the constant value of the golden number which is 1.618.
This is a succession of positive integer numbers, where each number is the sum of the previous two. For example, the first numbers of the Fibonacci sequence are: 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144 and so on.
The opportunities arising from the use of a strategy based on these successions depend on the fact that market trends assume oscillatory, rather than linear, trends.
An objective prerequisite for being able to identify and exploit a Fibonacci series is therefore the existence of a defined market trend. The price of a given currency must follow a direction defined with a movement called ‘swing’, and then reverse up to a certain level called ‘retracement’ (or backward tracing of the trendline), after which it is reversed again to resume the main trend, until when it does not exceed the previous maximum reached by the swing by a certain percentage  up to a point that it is called ‘extension’.On a graphical level Fibonacci retracements are identified by horizontal lines drawn at precise levels which depend on a market trend. They work a bit like they were additional supports and resistances, useful to establish the trend of prices and the turning points of the trends (both upward and downward). The levels to which they are usually placed are:
  • end and start: 0% and 100%;
  • 23.6%, 38.2%, 50%, 62.8%, 76.4%.
  • extensions: 161.8%, 261.8%, 423.6%.
In an uptrend the lines are drawn from the lowest point to the highest, while in the bearish one the opposite is true. By marking on the graph the extremes of the observed trend, it is possible to calculate the percentages of the traces, which become the reference point to understand the trend direction. If the trend changes direction then it will return to the different retracements.
Retracements are a tool that a trader must use to his advantage: graphically it requires to trace 5 horizontal lines on the diagrams that correspond to 5 possible areas in which the prices can return, with distances that are expressed according to the percentage of the original movement.
They also assume an even more important value if the levels of retracements coincide with supports or resistances, or trendlines that reflect current trends. These levels are even more fundamental to predict future price trends, or whether prices will remain within these levels or break one of the Fibonacci levels by overtaking it (up or down).