Trading Basics, Higher Math for Higher Profit

Leonardo Fibonacci was an Italian mathematician and number theorist. He is responsible for the decimal system we use today replacing the Roman numeral system. Can you imagine trading Forex using the Roman Numeral system? He lived during the thirteenth century. It has taken the New York Stock Exchange quite some time to adopt Leonardo’s idea of decimals, but they have got it right now. Leonardo also came to find a sequence of numbers that relate to the formation of a spiral. These spiral formations exist throughout nature and you can learn more by researching the subject.

We are concerned with the relationship of these Fibonacci levels and technical analysis. Nearly all charting software comes with a Fibo tool. The key Fibonacci ratios are 23.6%, 38.2%, 50%, 61.8% and 100%. It is unclear why these relationships pertain to the technical analysis of markets. As I stated in a previous article, the trader does not necessarily need to know why things work. We need to know what things work and how to use them. Fibonacci retracements occur 100% of the time in all timeframes. Trading these retracements is not an easy task. Even though we know the retracement will occur, we do not know when it will occur or to which level. The advantage for the trader using Fibonacci analysis is the anticipation of an event at these levels. I think these support and resistance levels are great places to enter positions.
I generally trade the reversal at these levels. The advantage of this trade is that you will know in a short time if your trade analysis is wrong. If the reversal does not occur, you can exit the trade with a small loss. Controlling losses is the essence of trading. When entering a position, the first question I ask myself is: How much am I willing to lose on this trade? The novice trader may ask: How much can I make on this trade? Before entering a trade, we must know the answer to both of these questions. The trader should have a definitive risk to reward ratio.

Trading these Fibonacci Retracements can be rewarding. Trade entry and exit points should be in place before trading. I have observed these Fibonacci scenarios play out in all timeframes. I am always amazed at the accuracy of the ratios. The only explanation that I can come up with is profit taking. Why does Fibonacci work? I don’t know.

Thanks for reading my article. To learn more about Fibonacci Ratios, please visit my website http://www.2tradesmart.com