Fibonacci Retracements and Relative Strength Index are some of the most-used technical indicators. Their rising dominance in the forex market attracts the following questions:
How should you use the two tools? Which is more substantial, Fibonacci Retracements or RSI? If you seek answers to these questions, you are in the right place.
Here, you will know how to calculate, apply, compare and contrast Fibonacci retracements and RSI. The knowledge will enable you to make data-driven forex decisions. And chop off your forex trading loss by more than 39%.
Definition and Calculation
The primary reason for using the technical indicators is to determine trend. Besides, they can help you determine other needs, such as momentum.
You use past data to project the price direction in finding trend. As momentum indicators, Fibonacci retracements and RSI help you determine the rate of price change in the projected direction.
Fibonacci Retracements originate from Leonardo Fibonacci’s magic numbers. The whole numbers begin with one and form an infinite series of numbers.
You get the current number by adding two last numbers in the series. Their average differs by 1.618 and has been critical in identifying trends in nature, such as patterns in flowers or pine leaves.
Here are the numbers
1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144…
- consecutive numbers in the series averages to 61.8%
- A number in the series by another situated two spots to the right averages to 38.2%.
- A number in the series by another situated three spots to the right averages to 23.6%.
The numbers 23.6%, 38.2%, 50%, 61.8% are used to mark resistance and support price charts. They are often referred to as Fibonacci retracements.
Although 50% is not a Fibonacci ratio, it is often included in the pattern since forex prices usually persist in a particular direction after hitting the mark.
Sell or buy as the trend approaches the support or resistance points.
To find the levels, draw a straight line joining the peak and trough of the curve. Partition the resulting line into the Fibonacci retracements.
Relative Strength Index, on the other hand, is both momentum and trend indicator. It tells you the weaknesses and strengths of recent closing prices. You can determine overbuying and underselling.
Use the following steps to calculate RSI:
- Calculate up moves and down moves.
- Average the up moves and down moves.
- Calculate Relative Strength (RS).
- Get the RSI.
Use the formula to proceed:
RSI = 100 – 100 / (1 + RS)
Where RS = Average gain /average loss
Both Fibonacci retracements and Relative Strength Index are trend indicators. You can monitor a pattern to determine when to buy or sell a currency pair.
In both indicators, you determine changes between highest highs and lowest lows. In RSI, the range is 0-100.
The main difference between Fibonacci retracements and relative strength index is that RSI shows strong buy and sell signals. On the other hand, Fibonacci numbers are Mathematical patterns that explain natural occurrences.
Some of the natural applications of the Fibonacci series are phyllotaxis, tree branching, fruiting and flowering. Besides, the patterns are helpful in coding theories.
Since the pattern is known to produce unique occurrences and designs in nature, it was adopted in forex trading to determine high and low swings.
Nevertheless, there is no logical proof in Fibonacci retracements applications in forex trading. Sometimes the patterns break. RSI, too, have drawbacks.
That is why it would be best to use both Fibonacci retracements and Relative Strength Index together to get the most accurate trend because none is more substantial.
Here is the summary of the differences.
|No strong signal||Reading below 30 shows overselling, and 70 shows overbuying.|
|Determine support and resistance levels||Know when a turn is taking place|
|The range is not predetermined||Specific range (0 to 100)|
|Lack logical proof||You can derive logical proof|
Both Fibonacci Retracements and Relative Strength Index are critical in determining currency pairs’ trend.
Fibonacci retracements are significant in identifying resistance and support signals in a market. RSI, by contrast, enable you to determine market overselling and overbuying.
You should use the two technical tools together to get the best trends.