Fibonacci

Fibonacci is a form of technical analysis in financial trading, named after the Italian mathematician, Leonardo Fibonacci, who lived during the 13th Century.

He used a series of special ratios in his calculations, today called Fibonacci ratios, derived from the Fibonacci sequence, where each number in this sequence is the sum of the previous two numbers, resulting in the following series of numbers: 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, etc... (the formula being: fn = f n-1 + f n-2).

Fibonacci Explained

The key Fibonacci ratio is achieved by dividing the last number by the previous number, or vice versa, e.g. (377 / 288 or 288 / 377) which gives 1.618 or 61.8 respectively, known as the golden ratio, from which other ratios are obtained, such as 23.6, 38.2.

These ratios are used today in financial trading by performing a Fibonacci study, and is a powerful tool in technical analysis.

This form of trading alludes to the fact that the price of an asset can react to Fibonacci ratios, and these reactions can be used to help traders to make trading decisions.

Just as price can react to traditional support and resistance lines, price can also react to Fibonacci ratios.

In particular, Fibonacci retracement levels are considered a predictive technical indicator since they attempt to identify where price may be in the future.

In theory, after a price begins a new trend direction, the price will retrace or return part way back to a previous price level before resuming in the direction of its trend.

In its most simplistic form, Fibonacci retracement levels can be used by identifying significant swing highs and swings lows.