Fibonacci retracement analysis is a popular tool used by traders to calculate possible target to enter and exit the market. The widely used technical analysis tool can also be used to determine potential levels of resistance and support. The concept behind this indicator tool is that whatever currency market you are interested will at some point retrace some previous activity. It will also find support and resistance at main levels before regaining its original direction.

The Fibonacci analysis is known as a leading indicator, which means its analysis does not lag. This makes it superior at predicting trends rather than simply reporting occurrences after the fact like other technical indicators. The Fibonacci tool concentrates on showing turning points in the market before they happen.

Fibonacci retracements are displayed in graph form. Levels are determined by selecting two extreme points on a foreign exchange chart and then drawing a trend line between the high and low market moves. The vertical distance is then divided by the main Fibonacci ratios 23.6, 38.2, 50, 61.8, 78.6, and 100 percent.  Once the levels are identified, horizontal lines are established and used to predict possible levels or support and resistance.

The ratios that are used to make the graph are drawn from key numbers identified by mathematician Leonardo Fibonacci in the thirteenth century. Each number develops the series of numbers in the sequence being the sum of the preceding two numbers.  The relationships between those series of numbers are expressed as percentage ratios. These percentage ratios are the retracement points plotted in the Fibonacci indicator.

Fibonacci was originally investigating the pace at which rabbit will multiply when breeding when he made his mathematic discovery. The Fibonacci ratios play an important role in nature and the stock market, though the exact reason is not known.

It is important to remember that an accurate projection using the Fibonacci tool will require a total of three points. The first two points will be used to determine the distance of the first move, and the third point should be considered the starting position of the projection.

This graphing technique may seem difficult, but the good news is the majority of charting packages that are available today will do this analysis automatically for you.

Experts agree that the Fibonacci analysis is a useful tool. Many successful traders use it for their analysis of the market and many will agree that the 50 percent retracement level is particularly significant. The most common belief is that the 38.2 percent retracement of a trend is a failed reversal and that the original trend will eventually continue. It is also believed that a 61.8 percent signals the start of a new trend.

However, you cannot base your foreign exchange strategies on Fibonacci levels alone. It is extremely difficult to pinpoint exactly which level the prices will begin retracing. For this reason many forex trading systems incorporate the Fibonacci analysis along with other indicators before selecting their market positions.

The forex market usually will find temporary resistance or support at the indicated Fibonacci retracement levels, but there are no ways to know ahead of time which levels will provide support.

The Fibonacci retracement points can be a useful guide in predicting changes or reversals in market trends. It is a popular leading indicator, but keep in mind that it is only meant to be used as a tool. Do not overlook other obvious market signals. The Fibonacci indicator is most useful when combined with other analysis tools. Combining Fibonacci retracement levels with other technical indicators can develop a successful foreign exchange trading systems and strategies.

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