Trends will never appear as a straight line. A trend always moves in one direction initially, pulls back and moves in the reverse direction for a while, then it turns around and continues to move in the previous direction. This is a natural outgoing tide and flow of a trend. When a currency pair continues its previous trend, forex traders should estimate how far the pair likely to continue its momentum. That’s when Fibonacci projection levels are useful. The Fibonacci ratios are convenient when you are trying to estimate how far a currency pair is going to move once it resumes its earlier trend. The ratios you will be using in your forex trading will help you find the following projection levels:
This level is calculated by dividing a number in the Fibonacci sequence by the number immediately prior to the sequence.
(89 ÷ 55 = 161.8%).
This level is calculated by dividing a number in the Fibonacci sequence by the second number prior to the sequence (89 ÷ 34 = 261.8%).
This level is calculated by dividing a number in the Fibonacci sequence by the third number prior to the sequence (89 ÷ 21 = 423.8%).
Preparing all three Fibonacci projection levels will give you potential support and resistance levels you can apply in your forex trading. These Fibonacci levels are shown on the daily GBP/USD chart below. The levels were illustrated along with the trend highlighted by the red arrow. Now that the GBP/USD has continued its up trend, you can use FP level to help you target a specific profit points (potential exit levels) as you buy this currency pair.
Watch that the currency pair has possibility to increase up to the 161.8 % projection level in the near future. When it reaches 161.8%, you can establish 261.8 percent projection level for your next profit target.