Fibonacci numbers! Doesn't that sound a lot like an enormous chapter in high school mathematics' book? If that's what you think then you are absolutely right. We are indeed talking about those kinds of numbers. Fibonacci numbers are a sequence of numbers formed as follows:
0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55… etc
The sequence begins with 0 and 1. Then keep adding the last two numbers to get the next. Meaning that:
0+1=1
1+1=2
1+2=3
2+3=5
3+5=8
5+8=13
well, you have got the picture now!
Why this sequence is called Fibonacci? The sequence of numbers was discovered by Leonardo de Pisa, also known as Fibonacci. He lived in 12^{th} century and was lucky enough to be the one to discover this amazing mathematical sequence. Off the topic Fibonacci numbers can be found EVERYWHERE! Scary enough these numbers represent the natural proportions of things in our enormous universe. And since forex is a part of the universe – Fibonacci numbers are applied here as well in search of a simple proportional solution for trading profits!
Speaking of trading, lets get to the main issue here – forex. You don't have to learn how to calculate any of this by yourself. The forex broker of your choice will provide you with software that calculates everything for you.
Now here is the mystery – with major ratios calculated from Fibonacci numbers forex traders can actually predict a behavior of trend and countertrend movements in forex market. Spooky!!!
Here is a set of numbers to remember: 38%, 50% and 62%
If you take these percentages and apply them to the trending price you will notice not only a certain amount of retracement, but also where new high and low could go. These marks are very important to forex traders since they are support and resistance areas where the price will either hesitate for a while or will reverse.
Before grabbing the charts there is one more thing you have to know. The primary trends move all together in 5 waves. First there are 3 forward waves, and then there are 2 backward waves. Now countertrends move differently – 3 waves at a time. First there are 2 forward waves, followed by 1 backward wave.
Now you are officially eligible to get some charts to "play" with and test your knowledge. Once you figure out how to place the marks correctly (every trading platform is different), you will definitely notice Fibonacci ratios in the price movements as it changes the position from support to resistance and back to support. Then you will realize that looking at certain time frames the trends tend to have similar proportionality. Wow!!
Whether on a hourly or a daily chart the Fibonacci lines that you draw are relevant until the price action has either confirmed or rejected them. Lets say if the price retraces to 38% line and then suddenly reverses again back to its original path crossing over the 0% line then you can for sure say that the cycle is over.