The next support/resistance indicator is a subject that could and has filled books, had entire forex training courses dedicated to it and has been the topic of hours and hours of online training webinars.

The concept of a Fibonacci retracement levels of support and resistance is the subject.

It is based on the work of an Italian mathematician who lived in the late 12th and early 13th centuries, when Europe was emerging from the Dark Ages. His real name was Leonardo Pisano Bigollo, but he had several aliases, including Leonardo of Pisa, Leonardo Pisano, Leonardo Bonacci and Leonardo Fibonacci.

With all these names, it would be tempting to conclude that Fibonacci was the original forex broker, with no slight intended toward the many fine forex brokers available now that bring credit to their profession. Fibonacci is credited with rediscovering a forgotten Greek mathematical concept known as the Golden Mean or Golden Ratio.

Simply stated, the ratio can be used to describe certain natural physical relationships, such as the length of the human hand compared to the arm or the length of a tree branch in relation to the trunk and even has been applied to the pattern of ocean waves advancing and retreating to/from the shore.

As it applies to predicting forex prices, the Fibonacci retracement indicator supplies various support/resistance levels were markets frequently reverse direction, providing a logical trade entry or exit price level.

How well this indicator works is highly dependent on how accurately the trader picks the correct price levels from which to initiate the Fibonacci scale. In an uptrend, the indicator is started at a significant low and drawn to a high price that represents a recent top. The opposite is done for a downtrend.

The support resistance levels that most trading platforms will return with the Fibonacci retracement indicator are: 0%, 23.6%, 38.2%, 50%, 61.8% and 100%. The 50% line is considered the most important. After a significant up or down price movement, prices for new support/resistance levels often appear at the halfway point between the low and the high of the move. The 38.2% and 61.8% lines follow in terms of significance.

Fibonacci retracement can be applied to any time frame and it is very interesting to observe a price reversal that occurs on a short time frame chart, seemingly for no apparent reason, show up as a Fibonacci level on a longer time frame chart.

Like any other support/resistance indicator, Fibonacci levels must be given some latitude.

One benefit they offer the trader who possesses good trading discipline is the opportunity to exit a trade for a manageable loss quickly should a Fibonacci level be broken against the trade.

They also seem to be almost magical when the trader is observing the markets from the sidelines and highly fallible when an actual trade is involved. Consider them as one of many weapons in your trader’s arsenal but don’t rely on them exclusively.