Analyzing Market Trends Using Fibonacci Analysis
Each and every market trend forecasting system provides advantages and an equal amount of disadvantages for every marketer and trader, and Fibonacci trading is not an exception to this generalization. But disadvantages in Fibonacci trading can be easily avoided if one has the proper tools and the proper knowledge in carrying out the system. Successful Fibonacci traders are often equipped with software and tools that makes computing and charting easier. Further, traders who become successful with Fibonacci trading have a deep knowledge on how to analyze market trends using Fibonacci analysis.
But how does one analyze market trends using Fibonacci analysis? There are a lot of methods, and an equal amount of tools, used by successful Fibonacci traders in analyzing market trends using Fibonacci analysis. Among the more common methods include Fibonacci retracements, Fibonacci extensions, Fibonacci time projections, Fibonacci fan lines, and Fibonacci arcs or spirals. Other traders use a lot more of other methods, including Fibonacci channels and ellipses. This article cannot give you in-depth information about the said methods, but it can surely give you a fine introduction. This article aims to provide you with as much information you need before you go on learning more about Fibonacci analysis.
The most basic method, if there is such a thing, in applying the Fibonacci sequence in predicting future market trends is the Fibonacci retracements. This method of Fibonacci analysis makes use of Fibonacci ratios, or the various ratios obtained by dividing succeeding Fibonacci numbers (either on 1st tier, 2nd tier, 3rd tier and so on). The most significant ratios applied in Fibonacci analysis using Fibonacci retracements include the numbers 0.618, 0.5, and 0.382. A 0.382 Fibonacci retracement, for example, means a continuation of the primary upward or downward trend while a 0.618 retracement is indicative of a change in market trend directions.
Using the same ratios used in Fibonacci retracements, Fibonacci analysis using Fibonacci extensions predicts the next peaks and valleys in the market trend chart. By multiplying the ratios with a previous market up-swing in an upward market trend, the next peak levels of the chart can be predicted. In the same manner, by multiplying the ratios with a previous down-swing level in a downward market trend, the next valleys in the chart can be predicted. This peaks and valleys are important for marketers, as they are indicative of when to make major moves in the trading industry.
Another method in Fibonacci analysis is called time projection. Fibonacci time projections predict when the next major up-swing or down-swing in the market trend chart would occur. Unlike the previous two methods, however, Fibonacci time projections use the Fibonacci numbers instead of the ratios for its projections.
The next two Fibonacci analysis methods, fan lines and spirals, are a bit more complex than the previous methods mentioned. These two methods would often need the aid of special tools and software for their implementations. Fibonacci fan lines refer to three lines whose slopes are based on the Fibonacci ratios. These three lines that projects into the future are used to indicate the resistance and support levels, which in turn are used as basis in predicting future price movements. Fibonacci spirals or arcs, on the other hand, are used to project possible price movements at a specific time in the future.
A lot of other methods and tools exists and are used by professional traders in their Fibonacci analysis. The space given us, however, is just not enough to discuss all of them. Nonetheless, the methods discussed should be enough to give you a hint on how Fibonacci analysis works. Should you want to further your knowledge about Fibonacci analysis and its components, there are a lot of web sites that offers online courses on the subject.
Again, some traders consider Fibonacci trading as advantageous while others do not. There is, however, a key into making Fibonacci trading work for your advantage, and that key is proper knowledge of Fibonacci analysis.