An optimist looks at a glass of water and says that it is half full; a pessimist looks at the same glass of water and asserts that it is half empty; a forex trader looks at it and ponders for a while then concludes that the glass is twice as big as it should be. Forex traders cover all the bases, they looks at charts from all angles and account for every possibility then make decisions based on timely and accurate information. The risks involved in forex trading are too high to entertain carelessness and the losses one can encounter are equally absolute.
Here are a few tips on retracement, reversals and the tools used – The famous Fibonacci numbers. Ever watched LOST, the movie series by ABC? Where the characters had to drudgingly enter seemingly random numbers into a computer or endure the consequences of some cataclysmic event if they didn’t? Sorry I digress I know, but if you have watched it the Fibonacci numbers are a similar sequence of numbers; I shan’t bore you with its history but all you need to know is that they are a numbered recursive sequence where the next number is the sum of the previous two (example 1, 1, 2, 3, 5, 8…etc). Now I know what you are thinking, so what right? The fascinating thing about these numbers is their natural occurrence in everyday things and in nature and how amazingly applicable these numbers are in technical analysis.
Depending on the chart you use (hourly or daily chart for a particular currency pair), you can find the support, and retracement levels by drawing a linear trend line graph from the most recent high to the most recent low. A retracement level is the point where the currency pair will continue its previous trend before continuing with its current trend. Hope I didn’t lose you there, but to put it even simpler if the number 5 was a retracement level and I asked you to count to 10 meaning the trend is upwards when you reach the number 5 you would ‘retrace’ i.e. go back to 4 maybe 3 maybe even 2 before continuing upwards again towards the number 10. Now say I didn’t tell you when to retrace, but you know at some point between 1 and 10 you have to, how would you do it? That’s right Fibonacci numbers.
Having got your trend line drawn, you then divide the vertical distance of the two extremities by the key Fibonacci ratios which are 23.6%, 38.2%, 50%, 61.8%. Where these points lay on the x-axis of your chart, is where your retracement levels are. I missed out the 100% ratio; this is known as the resistance level, or the level where the market does not expect the currency pair to exceed within a particular time and all things constant.
Most traders pay more attention to the 61.8% support level, but in general the reason why Fibonacci numbers are such good indicators of trend change is because millions of forex traders rely on them as pointers, thus if for whatever reason a currency pair goes against the support or breaks a resistance level, rest assured that you will see huge activity on the market at just that instant.
As a parting note, I have stared at my charts for minutes on end, watching market indecision as the market decides which way to swing after a resistance level was broken; it is at that moment that I take big positions as the opportunity to profit is tremendous. I hope these pointers have introduced you to the concepts of retracement, but you can always use one of the many free forex charts on the internet to try it out for yourself; also using a practice account you can learn just when to buy and when to sell.
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