Fibonacci Trading and the Advantages and Disadvantages It Poses to the Young Trader
There are a lot of ways to lose in the trading industry, but the best way is probably by coming unprepared. But losing in the trading industry is the least thing you want to happen. Sadly, this is the most common mistake that young and inexperienced traders fall into; the same mistake that the skillful trader expertly avoids. To avoid any circumstances that would lead to loses, experienced traders study market trends carefully. Experienced traders would also often use trading secrets that let them predict the future market trends depending on the past and existing trends in the market. Among these secrets is Fibonacci trading—a trading system that has been used by successful traders for years.
Fibonacci trading is a market trend analysis system that uses the Fibonacci numbers to predict future stock market trends. The Fibonacci number is a number sequence developed by the Italian mathematician and trader Leonardo Pisano, also known as Fibonacci. His numbers was said to have a wide range of applications, from the patterns of natures to the arts and to the different fields of science. In the 20th century, a marketing and trading application for the Fibonacci numbers was discovered, and thus Fibonacci trading was born.
Fibonacci trading provides a lot of advantages for the young trader if he properly understands the system and its analysis. First and foremost, the Fibonacci trading system is quite easy to understand, just as the Fibonacci sequence is easy to analyze. Actually, it is not the Fibonacci sequence that is used on Fibonacci trading but the ratio that each succeeding Fibonacci numbers create. Significant ratios derived from the include 0.618, 0.382, and 0.500. These numbers are often used to interpret retracements. A 0.382 retracement, for example, implies a continuation of either an upward or a downward trend while a 0.618 retracement is indicative of a probable change in the existing market trend.
Aside from being easy to understand, Fibonacci trading is also proven by many successful traders to be effective. This, probably, is the Fibonacci trading system’s edge over other trading systems discovered and formulated through time. Apart from the testimonies of successful traders, the Fibonacci trading system is also based on a well-laid principle, such used to describe various relationships and proportions. The greatest proof that such principle exists is, among other things, the way it predicts and describes the patterns of nature.
But while Fibonacci trading is fairly easy to use and has been proven effective, a lot of traders find it disadvantageous. While the basic principles behind Fibonacci trading is fairly simple, using it in analyzing future market trends can get a bit tedious. Computations for the different retracement levels can get a bit complex, and by the time you have finished all the computations, your work may appear so messy that it is impossible to use it for anything significant. The charting and computing methods used for Fibonacci trading is also time-consuming, causing most traders to abandon the method.
But the greatest disadvantage that Fibonacci trading poses results from the failure of traders to fully understand and analyze its results. Fibonacci trading is not a system that you can just use without studying how it is used and the process that must be taken in using it. Fibonacci trading can indeed get very complex and in this complex situations, traders not well-trained with the method gets confused and fails to read the real results. Thus, they fail in their marketing and trading ventures and resorts into blaming the system for their misfortunes.
While the disadvantages may seem too big to ignore, one can easily get away with it if he knows how the Fibonacci trading system really works. Again, the key in being successful with the system is sufficient knowledge about it. We cannot teach you everything about Fibonacci trading, as the topic is really too big to be discussed in just a single article. The good news is that there are a lot of sites offering courses in Fibonacci trading. And with new software tools for analyzing and interpreting market trends the Fibonacci way, Fibonacci trading gets even easier.