Using of Fibonacci numbers
The tendency in Forex market can be defined as a general direction of price movement. An upward trend exists when the price goes up, forming higher minimums and a downtrend is formed when the price goes down, forming lower minimums. The main goal in trend trading is positions’ opening as close to the beginning of trend formation and staying in it until trend changes.
The range is created when the price jumps repeatedly as tennis ball between two price levels. The purpose of trading in the range is buying from the lower range end (support) and selling from the upper range end (opposition).
So, if in the first case we just “connect” to the trend, in the second case we use the rule “buy cheap, sell expensive”. However, incorrect definition of market’s state can take the shape of very expensive trading errors. And one of the most popular methods of determining the market’s situation is to use the Fibonacci numbers. Quite often, when the trend changes its direction temporarily, the price finds support or opposition on key Fibonacci levels before continuing the initial move. These levels can be determined with the help of special tool in your terminal. As a result, you will receive a vertical division into the basic Fibonacci ratios of 38,2%, 50% and 61,8%.
Let’s consider an example, a significant upward rally begins reverse motion. If the price passes through three above mentioned levels, then this is very strong sign that the trend will not continue because no support has been found at these levels. It, as a rule, indicates that buyers do not control the market. And relatively equal power distribution between buyers and sellers most likely lead that the market will be in the range. However, if the price finds support, for example, at the level 50%, then this action shows that traders gained control over the market and the tendency will continue.