In mathematics, the Fibonacci sequence, that starts with 0 and 1, is a numerical series where each number is the sum of the two numbers that preced it (0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, etc).
When you divide a Fibonacci number by another Fibonacci number that is three places higher in the chain, you get 0.236 (23.6%).
When you divide a Fibonacci number by another Fibonacci number that is two places higher in the chain, you get 0.382 (38.2%).
When you divide a Fibonacci number by a succeeding Fibonacci number, you get 0.618 (61.8%).
The 0.786 (78.6%) Fibonacci number is the square root of 0.618 (61.8%).
Trading
Fibonacci
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Fibonacci Retracements
In trading, the Fibonacci retracements are potential levels of support/resistance that reveal where the price might retrace after an upward or downward impulse. The most used Fibonacci retracements are the 38.2% and the 61.8% (the 23.6% and the 78.6% are less popular). Although not a Fibonacci ratio per se, the 50% level is also considered an important Fibonacci retracement level (most notably recognized in the Dow Theory).When applying the Fibonacci retracements to a price impulse, make sure you do it :
- from Left to Right
- from the Low (L) to the High (H) in Uptrends
- from the High (H) to the Low (L) in Downtrends -
Golden Zone
There is a high probability that every uptrend or downtrend you'll encounter, no matter how big or small, will eventually retrace into the Fibonacci Golden Zone (the area between 38.2% and 61.8%).The price tends to make Smaller retraces (closer to the 38.2% level) in Stronger uptrends/downtrends.
The price tends to make Bigger retraces (closer to the 61.8% level) in Weaker uptrends/downtrends.
The price tends to make a 50% Fibonacci retracement in the majority of uptrends/downtrends. -
Fibonacci Extensions
In trading, the Fibonacci extensions are potential levels of support/resistance that reveal where the price might go to after a Fibonacci retracement. The Fibonacci extensions I normally use are the 100%, the 138.2%, the 161.8% (extremely important level, also known as the Golden Ratio), and the 200%.When applying the Fibonacci extensions to a price impulse, make sure you do it :
- from Left to Right
- from the Low (L) to the High (H) to the Retracement (R) in Uptrends
- from the High (H) to the Low (L) to the Retracement (R) in Downtrends