Fibonacci Sequences in Technical Analysis

Fibonacci is known for discovering a series of numbers that was called after him the Fibonacci numbers or the Fibonacci sequence.

1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233 …

In the Fibonacci sequence each term, except for the first two, is the sum of the two previous terms for example, 2+3=5, 3+5=8.

Golden Ratio

Fibonacci also found that dividing each number in this sequence by the one that precedes it produces a ratio of about 1.618 after the first four calculations. This number is known as the golden ratio. For example 233/144=1.618. More info

Fibonacci Levels

The ratio between any number and the next higher number approaches 0.618 for example 21/34=0.6176

Also, The ratio between any number and the two next higher number approaches 0.382 for example 89/233=0.3819

These ratios usually rounded off to 1.62, 0.62 and 0.38 and the percent of these ratios called Fibonacci levels.

Fibonacci Indicators

Fibonacci indicators help traders to anticipate support and resistance levels along with price targets.

Trading software calculates and draws indicators automatically and you should learn how to use them.

There are many Fibonacci indicators like the following:

a. Fibonacci Arc
b. Fibonacci Fan
c. Fibonacci Retracement
d. Fibonacci Extensions
c. Fibonacci Clusters
d. Fibonacci Time Zones
e. Fibonacci Channel

Fibonacci Arcs are drawn for predicting support and resistance levels; those are three curves that usually drawn between the high and trough in a given period.

Image result for fibonacci arc graph

Fibonacci Fans are three straight lines that used for forecasting support or resistance areas.

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Fibonacci Retracements are based on a trendline drawn between a significant trough and high. If the trend is rising, the retracement lines will descend from 100% to 0%. If the trendline is falling, the retracement lines will ascend from 0% to 100%.

Image result for fibonacci retracement graph

Fibonacci Extensions Levels used in Fibonacci retracement to forecast areas of support or resistance. Extensions consist of all levels drawn beyond the standard 100% level and are used by many traders to determine areas where they will wish to take profits. The most popular extension levels are 161.8%, 261.8% and 423.6%.

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