In this report, we will examine the history and background of Fibonacci numbers and The Golden Ratio. We will then outline three specific money management tips that can help increase your profit potential.
The Fibonacci sequence first appeared as the solution to a challenge in the Liber Abaci, a book written by Leonardo Fibonacci in 1202 to introduce the Hindu-Arabic numerals used today to a Europe still using Roman numerals.
The original problem in the Liber Abaci posed the question: How many pairs of rabbits can be produced from a single pair, if each month each mature pair brings forth a new pair. These, from the second month, becomes productive.
After the first few numbers in the Fibonacci sequence, the ratio of any number to the next higher number is approximately.618, and the lower number is 1.618. These two figures are the golden mean or the golden ratio.
Its proportions are pleasing to the human senses and it seems that throughout biology, art, architecture, and music. A few examples of natural shapes based on the Golden Ratio include DNA molecules, snail shells, galaxies, hurricanes, and sunflowers.
For instance, if at least three Fibonacci price levels come together in a relatively tight zone, a stop loss placement just below or above the zone may be set.
A Fibonacci number helps define stops in the next way, if a trader trades against a support zone, if the support zone is violated and the price trades below that zone, the reason why the trade is negated and the location should be closed.
Setting stops using Fibonacci retracements takes the emotion out of trading and gives a pre defined exit point.
Fibonacci numbers can also define position size based on the risk you’re prepared to take per trade. For instance, if prices are right on a specific level, you might want to have more positions only if the price is further away.
With Fibonacci numbers, once a pattern completes against a Fibonacci price zone you can use them to set profit objectives to bank partial profits or tighten stop loss levels. This clear objective for traders helps them to lock in profits. The great advantage of Fibonacci numbers and the golden ratio lies in the fact that they take the emotion out of trading and can define not only stop losses to exit a market, but likewise set profit objectives as well.
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Forex trading is personality bound which makes it difficult for someone to figure out what works for you. You'll have to start studying the most popular technical indicators and find out which setup works for you. Some traders are successful with for example a "moving average-candle patterns-oscillator" configuration, others fail with the very same setup. So you need to work at it in making a trading plan that is consistent and that you can use over and over again. You could do a course but then again there's no guarantee of success exactly because someone else's' trading plan is not always "transferable". You need to feel comfortable with certain technical indicators and the most popular ones are the following (in random order): – Moving averages – Bollinger Bands – RSI – Stochastics – Fibonacci – Candle patterns – CCI – MACD These indicators are all you need to find your personal setup. You do not need to use all of them, 2 or 3 is enough. Some traders use RSI with Boll. bands and an oscillator, other only exponential moving averages and candle patterns, …etc. Keep in mind, however, that price is the ultimate indicator. Technical indicators are merely tools to help you guide through the waves of the market, in other words, how price is currently behaving. You therefore need to establish whether price is ranging or trending up or down. Once established how price is moving , the next step would be applying the indicators. One more tip, the larger the time frame the more reliable signals are. A buy signal on a daily chart is more reliable than on a 5 minute chart because a daily chart holds much more market information. This doesn't necessarily mean you can't trade with 5 minute or other short term timeframes, it means you need a larger timeframe to back up your trading decisions on the 5 minute. Words of wisdom: – Always start with a free practice account – The Forex market is not a get-rich-quick opportunity – Beware of fear and greed, you HAVE TO be relaxed – What you see on the charts is the absolute truth, so believe what you see. If the charts don't make sense then you are absolutely right. Wait for the market to be less confusing. – Patience is a virtue. – Losses are part of the game, with a solid trading plan there's no need to fear a loss once in a while, because the confidence you have in yourself and the trading method let you know the next trades will be winners. – Always limit your losses, either with a automated stoploss or a mental stoploss. Websites: www.babypips.com www.investopedia.com www.forexfactory.com www.fxcm.com the better brokers: FXCM, FXSOL, ACM, DBFX, Saxobank, MGForex Success and always think positive…
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