You don't have to be around forex very long before you start hearing about fib this and fib that. Fib extensions and fib retracements. You might be wondering what all that is about?
Fibonacci was a mathemetician who lived 800 years ago, and his findings are still shaping the world today. He discovered for us a ratio that came to be know as the "golden mean". The ratio is found in the equation, 1+1=2, 1+2=3, 2+3=5, 3+5=8, and so on. The ratio itself is 618/1000, or 61.8.
Lost yet? Don't worry, it gets easier from here. Market traders have discovered that this ratio plays a role in the psychological side of trading the forex. Here's how. If a currency pair makes a bull run, in this case let's use the Pound/Dollar, and it moves from 1.5200 to 1.5300, we say it has moved 100 pips or 1 cent.
Fibonacci ratios tell us that after such a move, the currency pair is likely to retrace 38.2% to 1.5262. It will find support there, and that is called a fibonacci retracement. If after that move, it again attains the 1.5300 level, it may very well head into a fibonacci extension, of 32.8 or further to 62.8. These become price targets as the bull move continues.
Knowing these levels in advance will help explain why prices seem random. In reality they are anything but that. We'll delve a little more into this tomorrow, as there are some other important ratios of which the educated trader ought to be aware.
Until next time...Happy Trading!
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