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Analysis of various Fibonacci tools

23rd May 2011
By forexabode in Business Law
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p>There are many Fibonacci analysis indicators available. This article is to see which ones we should use.

Fibonacci numbers or sequence seems like a mystery and magic, specially when it comes to the Fibonacci sequence appearing in so many things in nature. Seed heads, petals on flowers, vegetables, leaf arrangements on plants, family trees, shells so on.

Well, the logic behind Fibonacci numbers and the golden ratio derived from these numbers in nature is one thing but Fibonacci numbers as technical analysis tool for trading is another thing.

Everything in nature also do not show Fibonacci numbers behind it and the same goes with trading that all market moves would not follow Fibonacci analysis. While saying this let me also say that they work many times.

Why do technical analysis indicators work?

The major reason that any technical analysis indicator works is mainly because of the number of traders taking major positions on the basis of the signals generated by it. The success of any indicator depends on the number of traders following the signals generated by it. A sell signal comes and people start selling big and the prices would drop further down.

But it is not so simple as it looks. There are many other factors which come into picture. What kind of time frame charts the traders are using and what kind of trades they are making and all.

Fibonacci analysis started with Fibonacci retracements. Market always take a corrective action even in strong trends. But to what extent the corrective move would take it to? Here came into picture the Fibonacci retracements. It may look surprising as too how many times we see the trending prices retracing to Fibonacci levels of 38.2%, 50% or 61.8% and then continuing the trend.

But then the question comes as to why market reverses to Fibonacci retracement levels so frequently? Well, it just proves that many traders are placing their trades considering that price will retrace back to those levels and then move up form there. And this is just so many traders placing trades at those levels that make the market to move the Fibonacci way.

As mentioned above that Fibonacci numbers at times show that there is a magic behind it. And that makes many to think that Fibonacci is the key. Thinking on those lines would make people to try to find newer ways of analysis based on Fibonacci numbers or sequence. This brought in many other Fibonacci tools in existence. These tools are Fibonacci extensions, Fibonacci Arcs, Fibonacci Fans, Fibonacci Time zones etc. All these tools using Fibonacci numbers in different ways. For example Fibonacci arcs also indicate retracement levels but unlike the flat Fibonacci retracements, Fibonacci arcs take time into account.

Question is which Fibonacci analysis is better? Well, I would say that the better is the one which is used by more number of traders. Most of the professional traders like the simplicity and use only selective indicators. And here the vote would go to the original Fibonacci retracements out of all the other Fib analysis tools.

To which Fibonacci level the price may retrace:

To what level we may expect the correction depends on the strength of the trend. In very strong trend correction may not be very big while in less strong trends the prices my go for a bigger correction.

Always use some other indicators to check what the strength of the trend is and whether any indicator is indicating a trend reversal. We can use ADX, Stochastic and MACD, Ichimoku clouds etc. If the ongoing trend is very strong then price may not retrace very much and may only go to 38.2% level. If the trend is moderate then it may further retrace to deeper levels. It always helps to use a balance combination of indicators which complement each other and not compete with each other.

Technical indicators and time frames:

What kind of time frame charts the traders are using and what kind of trades they are making for major trades also adds to the dependability of the signals. One thing is sure that no big trades would happen on the basis of the analysis on 5 minute charts. Keeping a track of longer term charts and shorter term charts is always important to see the true direction and knowing entry and exit points.

Ichimoku Cloud or Ichimoku Kinko Hyo Charts: A beautiful indicator but often an ignored one. Ichimoku doesn't only give buy/sell signals but tells the strength of the signals. It also indicates support and resistance levels.Fibonacci sequence as retracement and extension levels- Learn about Fibonacci analysis using various tools based on Fib sequence (numbers) e.g. Fibonacci Arcs, fans and Time Zones.

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