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Trading based on the Fibonacci method is a unique way of analyzing markets. The Fibonacci hypothesis that was developed by the famous mathematician, Leonardo de Pisa, has stood the test of time. Traders apply the concepts of Fibonacci and the golden ratio; represented by the number 1.618, in various forms of technical analysis. Fibonacci methods, however, are most commonly applied to identify support and resistance levels.

Fibonacci Sequence in Forex Trading

Before we look into the mechanics of Fibonacci trading and how it translates into a Forex Fibonacci trading strategy, it is important to understand the Fibonacci sequence and the unique mathematical properties it provides first.

The Fibonacci sequence is a sequence of numbers where, after 0 and 1, every number is the sum of the two previous numbers. This continues to infinity:

0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987, 1597, 2584, 4181, 6765….

Important Ratios in Forex Technical Analysis

The further you progress into the sequence; you will find that each number becomes 1.618 times greater than the preceding number. For example, when you divide 89 by 144, you get 0.618, but when you divide 89 by 55, you get 1.618; the golden ratio.

Based on the Fibonacci sequence, you now know two main ratios; Golden Ratio, which is 1.618 and its inverse; 0.618. Aside from the above, other ratios include 0.382. This ratio is formed when you take a number and divide it by the number two places to the right.

Thus, 89/244 = 0.3819 or 0.382 when rounded to 3 decimal