Fibonacci Retracements Vs. Dynamic Fibonacci
It doesn’t take long for a new trader to figure out that terminology is very important.
When entering on the path to a successful future trading forex, knowing key words and understanding the key concepts that go with them is critical to one’s success.
Heck, Learning how to trade requires learning a “new language”. Trend, range bound, short, long, multiple time frames, indicators, currency pairs, risk-reward, stop loss, and choppy markets are a few examples of the lingo of trading.
Early on in my trading career, I recall being in a chat room listening and I could barely understand a thing that was being discussed. I remember my mentor explaining levels. He pulled up a chart, pointed out some bottoms of a sequence of candlesticks, and in 3 seconds stated, “ and that my friends is how to identify a “level”.
Honestly, I just didn’t get it.
The reason I couldn’t get the idea of “level” in my head was because if you look across a chart you can connect the ends or tops of candlesticks at so many points that lines can be virtually anyplace. And, as a new trader I was left wondering what or how I was supposed to use this.
That brings us to how I got beyond this dilemma.
First, I wondered upon something called Fibonacci Retracements.
I am going to give a very simplified version of the concept of Fibonacci Retracements. The overall concept has to do a numerical sequence and the common relationship between the numbers in that sequence is approximately 1.618% greater than the preceding number.
This common relationship between every number in the sequence is the common ratio used in retracement studies for trading. Retracements are areas where price action will visit and revisit; hence, creating a level in that price action. That level ends up being support or resistance which creates opportunities for entries, areas to place stops and profit targets, and areas where consolidations occur.
I must confess I do not use Fibonnaci Retracements because I just can’t be sure I am drawing them correctly. They are complicated, annoying, and misleading simply because I can’t draw them accurately, all of the time. But, the concept is most important.
The concept of price action revisiting areas over time. And, the amazing thing is that if you develop your price-action reading skills then you will look back into price action history and recognize these areas. Notice, I shifted from the term “levels” to “areas”.
But, how can anyone who trades be as sure as humanly possible regarding areas that may be significant in trading price action?
I have found the FxPM Forex Fibonacci Software to be the most helpful tool for me in this area.
The red and green zones represented on charts are areas that are based on the common ratio stated above.
Levels are not identified; rather, significant areas based upon Fibonnaci Retracements are illuminated.
Now, I spend a lot less time finding levels because I can identify price zones which are more useful to me in setting the probabilities in my favor.
Profitable trading to all!
FxST Education Specialist
Dr. Debbie Badawi’s formal education, training, and career is in the field of education. Ten years ago, upon an early retirement, she entered the world of trading equities and then found her passion in day trading and swing trading the Forex Market. Although she trades various currency pairs, she spends much of her trading focus on the EUR/USD. In addition to trading, Debbie mentors other traders, works with the team at FXST, and runs her educational consulting business where parents find educational solutions for their children. When asked what’s next or what’s Debbie’s future? Debbie smiles and precisely says, “ a simple life comforted by a six figure income and a financially free retirement.”