Fibonacci Support And Resistance

Fibonacci ratios are used to describe the price action in the forex market or almost all other markets by the traders. These ratios work very well on the weekly, daily and 4 hourly charts. A large price movement from the low to the high is followed by the price action attempting to retrace the original move. This is the basis of fibonacci retracement in forex trading.

Now,you might ask what is the basis of this Fibonacci Retracement. The basis of this Fibonacci Retracement is the fact that the price action does not move in one direction forever. Whether the price action moves up from low to high or down from high to low, it stops at some point and tries to consolidate it’s movement by making a retracement. Yes, the price tries to go back to from where it had come. This retracement can be 100% or less than that. Fibonacci Retracement gives you the possible levels of these retracements.

When the price action stops and tries to make a retracement, it is said to be resting or consolidating and this is known as Consolidation. Why the market tries to consolidate itself? Markets are just people buying and selling. When the prices make a movement too fast in one direction, this makes these buyers and sellers in the market jittery and they tend to stop buying or selling at some level in order to take stock of the market situation. This is the basis of this consolidation.

Now, let’s explain everything with a practical example. Suppose the price action makes a move from the low to the high on a particular currency pair or for that matter any stock or security. In the beginning, the price action moves in the upward direction fast as more and more buyers jump into the market. But after sometime, the buyers get exhausted and the price action starts losing the momentum. Soon, the price action reaches it’s highest point and after that starts to move downward.

This is done with the thinking that the price action will go all the way back to the level from where it had started. When it does reach the original level, it is 100 percent level price retracement.

In the same way, if the price action moved from high to low, the 100 percent level retracement level will be in this case the original level, the high point. This will be the level where there will be 100 percent retracement. Once, you connect the low with the high, the Fib Graphic Tool will draw the Fibonacci Levels.

If the price action probes a Fibonacci Level but fails to go through it, you as a trader can make a reliable assumption that there is key support at that level and the market is responding to that fibonacci level. In case of a move from the high to low, this level will be taken as a key resistance instead of a support.

You don’t know yet what will happen when the price action reaches these levels. If the price action probes the 38.2% level and goes through it, it means that this level was meaningless for the market. But, on the other hand, if the price action is unable to go through this level and simply can’t breakout from it, it is a key area of support if the price action was from low to the high. On the other hand, if the original price move was from high to low then this 38.2% becomes a key area of resistance in case the price action is unable to go through it.

Mr. Ahmad Hassam has done Masters from Harvard University. Learn this powerful Fibonacci Retracement method FREE that pulls 500+ pips per trade. Get these Forex Scalping Cheatsheets plus the 10X Scalping System FREE.