Originally developed by Leonardo Fibonacci around the year 1200, the Fibonacci sequence was created as a way of modeling how pairs of numbers could continue to reproduce in an increasing ratio sequence, basically forever. Fibonacci's rules and his sequence and percentages have been used to solve problems in all kinds of fields ever since, and many forex traders use it today to help them find areas of support and resistance on their price charts.

Currency trading incorporating the use of Fibonacci numbers has come in and out of favor over the last 20 years, and the way people have used the numbers in their trading decisions has also evolved over that time. So what does a typical trading plan look like when it incorporates this powerful sequence of numbers to help make trading decisions?

Looking at what Fibonacci numbers are when it comes to ranges and retracements is a good place to start. You might even become a more successful trader if you're able to understand what Fibonacci was getting at and create a more robust trading plan around the use of this powerful tool.

At it's essence, Fibonacci currency trading uses the numbers and number sequence to help you identify stop loss levels and price objectives for your trades. Some people argue that setting stop loss levels based on Fibonacci price points takes some of the risk out of forex trading.

In many ways, it is true that you can use these numbers and price levels to reduce risk, because the strategy lets you to keep losses small due to your stops being limited to a small area of price. Typical Fibonacci based stop loss levels are below price retracements of 38%, 50% and 62%. And with these levels pre-determined before entering each trade, you know up front the amount of risk you are taking, which lets you use correct position sizing and trade management as well.

The downside of using Fibonacci is that you can be taken out of long-term profitable positions too early by having your stop loss too close to the market. I guess the fact is if you want to trade for any length of time, you'll have to put your stops somewhere. The thing is, using a Fibonacci price level is not always the best option for every market situation.

The other side of the coin is that Fibonacci numbers can also be used to define price objectives for each trade. Typical price objectives can be 100%, 138% and 162% of previous ranges. This can take some of the excitement out of trading because you have a predetermined exit point (which limits your potential profits), but it gives you an increased margin for safety when trading.

So in the final analysis, trading using Fibonacci numbers and percentages can help you enter and exit trades more accurately as well as reducing your risk. Trading fun and excitement is NOT what this business is about; safety and having profitable trades really is the objective. If that's what you are after, adding some Fibonacci to your trading plan can often be a very good idea.