There are a number of different strategies that are used in Forex trading; some of them assumed to be far more successful than others. People generally show a very strong inclination towards quantitative values and because of that quantitative strategies tend to be the ones that are previewed the most and reviewed the most. By far the most popular quantitative strategy has to be the one that involves protected Fibonacci targets. This is a strategy that is an interesting turn on the way that many sciences use the Fibonacci sequence and many people have indeed found it to be very successful when used in the Forex trading.
Fibonacci Sequence
The Fibonacci sequence is one that everyone is taught in math class at a very young age. Named for an Italian mathematician and scientist, the Fibonacci sequence of numbers is essentially a sequence where the next number is derived by adding together the two previous numbers, with the first number starting at one. So we start with one number…
1
And then we take the sum of the previous two numbers to generate the next number in the sequence. In this case there is no second number, so it is simply 0+1 = 1 and the sequence then becomes…
1, 1
Adding those two numbers together gives us the next number in the sequence…
1, 1, 2
Then one more…
1, 1, 2, 3
And so forth until you get the first ten numbers…
1, 1, 2, 3, 5, 8, 13, 21, 34, 55
And so on until infinity.
Forex Fibonacci
This sequence is an important sequence because it has been related to a lot of naturally occurring processes in the sciences and therefore has a predictive value in those sciences. What many people have come to realize is that the Fibonacci sequence of numbers also has a predictive value in Forex trading as well and this has given rise to the concepts of levels.
When there is sideways motion in a trend (i.e. it oscillates up and down between two boundaries) the upper boundary is often referred to as the resistance boundary and the lower one the support boundary. When the support boundary is broken, many analysts make the observation that the rebound tends to come back up to it; in other words, the broken support boundary forms the resistance boundary for the next round.
Now this is where the Fibonacci sequence comes in. Once the resistance boundary has been hit once and the rebound occurred, the observation is made that the next resistance boundary tends to be around 50% of the first boundary (in other words, moving from 1/1 to 1/2) and then the next one tends to be around 33% of the first boundary (1/1 to 1/2 to 1/3).
Taking this out to is natural Fibonacci progression, this means that you can often predict targets using the 100% (1), 50% (1/2), 33% (1/3), 20% (1/5) sequence to predict the locations of the next resistance line. In other words, the resistance lines will be 1/x, where x is the next number in the Fibonacci progression. Understanding and applying this can allow you to make a lot of useful money in prediction rather than trend following.
