A forex strategy seeking to profit from Fibonacci retracement levels utilizes forex charts in an effort to determine when the price direction will reverse. Fibonacci retracement levels, named after the 12th-century Italian mathematician who laid the intellectual foundation for the strategy, are based on numbers that have common patterns. The Fibonacci Theory postulates that there are numbers that have 0.618, 16.18, and 61.8% in common due to one being equal to the sum of the previous two.

As examples: 21, 34, 55, etc….

Based on The Fibonacci Theory, there has been found many activities and forms throughout nature that share this numerical foundation. Fibonacci discovered that 38.2%, 50% and 61.8% were common as well. Traders utilize these resistance levels as part of a forex strategy in five areas:

• Retracement is a minor reversal from the previous price trend. To profit from this, the Fibonacci indicator is selected with the high and low levels established. Within that range, five resistance levels are set (0%, 38.2%, 50%, 61.8%, 100%). There can be additional resistance levels added above 100%, if desired.

• Extension is like Retracement but it is for the Fibonacci numbers that go beyond the 100% level. For the Extension, the most common levels are 161.8%, 261.8%, and 423.6%. The Extension technique must be combined with others in order to establish the target price.

• Time Zones utilize Fibonacci numbers to determine the periods where the price movements will be outsized. Utilizing automated forex trading . orders are placed for every consecutive day that corresponds to the next position in the series of Fibonacci price targets.

• Arcs are like Retracement in that lower and upper ranges are established. Three semi-circles are then drawn with the top point as the center. Each semi-circle crosses a diagonal line connecting the top point and bottom point at the exact points of 38.2%, 50%, and 61.8%. From this, the lines of resistance or support are created that form reversal trading.

• Fans are like Arcs and Retracements. The top and bottom ranges are created. Within any given time segment, diagonal lines are drawn from the lowest to the highest point. With this vertical distance known, 38.2%, 50%, and 61.8% are charted to establish the resistance and support levels.

Like all forex strategies, none of the five variations of the Fibonacci Theory can yield profits by itself. If that were the case, then everyone would utilize it and there would be no margin for profit. However, deployed with other indicators, include others operating under the Fibonacci Theory, Fibonacci retracement levels can better determine the future direction of foreign currency assets.