When it comes to CFD trading, you may have heard of the terms “Fibonacci Retracement”. If you have always wondered what that is and how it is related to CFD share trading, you have come to the right place. Today, we will explain what exactly the Fibonacci trading strategy is and its role in CFD trading. Let’s get started learning traders!
What Are Fibonacci Numbers?
Fibonacci numbers are a special type of numbers developed by Italian mathematician Leonardo Pisano in the 12th Century. The numbers were studied and further developed by mathematician Edouard Lucas in the 19th Century.
The numbers represent a sequence by which every subsequent number is obtained by adding the two preceding numbers. The sequence starts with 0 and go on as 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89,144 etc.
When the ratio between two consecutive numbers of the Fibonacci sequence is taken – for example, the 5th and 6th or the 6th and 7th – we get 1.618 as the result. As we continue to take the ratio of the numbers in the sequence, it comes to the result as 1.618033988749895, which is also known as “Phi” or the “Golden Ratio”. Apart from the Golden Ratio, we also get other Fibonacci ratios (23.6%, 38.2%, 50%, 61.8% & 100%) which indicate the relationship between the numbers in the sequence.
What Is The Fibonacci Trading Strategy?
The Fibonacci sequence and ratios are found everywhere in nature. Right from the geometry within a flower to how our human body has evolved. This is why traders started using the sequence in trading analysis too; they figured if the Fibonacci sequence is everywhere, maybe it’s something that may also relate to financial trading. And this was true.
In share trading and forex trading, the Fibonacci sequence is used as a technical indicator to determine the possible way in which specific forex or share prices will move. Essentially, the Fibonacci numbers can be used to forecast the potential price of stocks and forex in a specific timeline. The sequence and ratios can help speculate the future financial performance of the stock market with surprising accuracy. However, let it be known that while useful, results obtained using the Fibonacci sequence are in no way guaranteed.
The objective of using the Fibonacci sequence/ratios in share trading is to help traders understand where the resistance and support levels lie for a chosen trading pair. This information can then help them decide whether they should open a buy or sell deal, and when to enter or exit.
What Is A Share Or Forex Retracement?
In the world of stock and forex trading, retracements refer to a temporary reversal in trends. If the market is currently on a high trend, the retracement could entail a temporary low swing and a subsequent return to the high trend after a short period of time. And vice versa.
What Are Fibonacci Retracements And How Do They Work?
The Fibonacci numbers enable traders to speculate on when the next “High” or “Low” swing may occur in the trading market. In particular, the Fibonacci ratios tell traders when the market could reverse its current trend/position, in regards to the retracement. The technique of using the Fibonacci numbers and ratios to forecast potential prices and retracements in the financial market is called Fibonacci retracements.
When using Fibonacci retracements, traders look to check if the trading pair is at the 50% level. This indicates that the trend is currently stable and unchanging. While 50% is not a Fibonacci ratio, it is used by traders for ease of understanding.
Now, if the trading level goes below 50% and reaches the 38.2% or 23.6% mark, it means the reversal of the trend has begun in earnest. Traders monitor the trading pair to check at what point the levels revert back to 50%. When the trading level crosses 50% and moves towards 61.8% or 76.4%, it indicates how strongly the trend is moving back to its original position.
CFD Trading And Fibonacci Retracements
CFDs refer to Contracts for Difference. In CFD trading, traders don’t take ownership of the actual underlying asset. Instead, they pay the difference in asset value based on its opening value and closing value during trading.
CFD trading works on price speculation. This is where Fibonacci retracements can help. By using the Fibonacci ratios, you can study how your chosen trading pair is currently performing. You can use this information to decide whether to buy more shares or forex CFDs or to sell what you currently hold, with the goal of making a potential profit.
Common Fibonacci Retracement Mistakes To Avoid
Now that we know how Fibonacci retracements work in CFD trading, let’s look at some of the common Fibonacci retracement mistakes that traders make and which you could avoid:
· Don’t mix and match your reference points – If you are using the lowest price point as your reference, always analyze your trading pair with the Fibonacci retracement using the lowest price point.
· Keep track of the long-term trend – While Fibonacci retracements are a short-term trading forecast strategy, you could supplement your decision-making by keeping track of the long-term trend. This is mainly because very short time frames can skew your results. By keeping track of long-term trends, you may be better prepared to take advantage of your Fibonacci retracements.
· Using only the Fibonacci retracement strategy for trading – Just as with other trading strategies, Fibonacci retracement is only an indicator. Relying on it as the sole indicator can become problematic since it shows you only one side of the picture. Combine Fibonacci retracement with other strategies you prefer so you get a holistic perspective of your trend.
Tips For Using Fibonacci Retracements When CFD Trading
· Use the Fibonacci retracement to understand the levels of support and resistance you face when trading in CFDs.
· Use the Fibonacci retracement to identify when to enter the market and when to exit it.
· Use the Fibonacci retracement to understand when to short or long your CFD deals.
· Use the Fibonacci retracement to pick up on trend changes and prepare for any possible scenarios.
Wrapping Up Top Trading Tips
Fibonacci retracement strategy can be a helpful technique to use when CFD trading. Try it today and see how it can help supplement your own trading strategy for improved investing ROI.