Technical levels are one of the crucial elements of technical analysis on the Forex market. Technical levels represent a certain value approaching which the price faces resistance in further movement. On the chart it is pictured as zone (level), where price went and bounced off later, repeated its movement to the level again and without being able to pass it bounced off. Such approaching and returns can take place on a repeated basis and the more efforts are made, the stronger price level we have.
The levels are divided into two types:
Support level – located in the bottom part of the price thereby supporting the price and not allowing to drop down
Resistance level – located above the price, not letting it move up and serving as resistance
One of the main rules implies that the price would rather bounce off the level than breaking it up. But it is important to remember that breaking up is still possible and ore often it happens at strong momentum of price movement, for example, publishing important news, and in this case the price can break the level for a great number of points. This principle is applied in many break up techniques, but they are rather aggressive and risky for trading.
Fibonacci retracement in Forex is in the same way resistant and supportive levels along the price movement. The ground of this indicator is the interrelation discovered by Italian mathematician Leonardo Fibonacci a long time before occurrence of the Forex market. What is that? Every subsequent number is equal to the sum of two previous numbers. Starting row from zero, we can continue it to the infinity – 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144…
Also Fibonacci numbers are connected by “Golden ration” - 0,618. coefficient. Mathematician did not discover this proportion, he just reminded everybody about it, because it was known since the time of ancient Greece.
Application in trading
Over the course of price movement, we can miss a clear trend, technical figures, but levels are always present. By placing them traders know on which levels the profit should be fixed.
At this point, Fibo levels are very comfortable. When the price approaches to the level, the probability of reversal is high because it is easier for the price to bounce off than break. Also it should be remembered that the bigger time-frame you use, the stronger signal for entering the market you get.
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