Fibonacci Retracements

Leonardo Pisano, nicknamed Fibonacci, was an Italian mathematician born in Pisa in the year 1170. His father Guglielmo Bonaccio worked at a trading post in Bugia, now called Béjaïa, a Mediterranean port in northeastern Algeria. As a young man, Fibonacci studied mathematics in Bugia, and during his extensive travels, he learned about the advantages of the Hindu-Arabic numeral system.

In the Fibonacci sequence of numbers, after 0 and 1, each number is the sum of the two prior numbers.In the context of trading, the numbers used in Fibonacci retracements are not numbers in Fibonacci's sequence; instead, they are derived from mathematical relationships between numbers in the sequence.Fibonacci retracement levels are depicted by taking high and low points on a chart and marking the key Fibonacci ratios horizontally to produce a grid; these horizontal lines are used to identify possible price reversal points.

If you are an active trader you might have noticed that financial asset prices follow certain patterns. A pattern that consistently occurs is consolidation between price ranges.Financial assets will often trade in a tight range, consolidating a recent move, and then move to another range and repeat the process.Even during market trends prices tend to target specific levels before moving on to the next region. One of the best ways to forecast price targets is through Fibonacci retracements analysis.Fibonacci retracement analysis can be used to confirm an entry-level, target a take profit as well as determine your stop loss level.

Fibonacci Levels Used in the Financial Markets In the context of trading, the numbers used in Fibonacci retracements are not numbers in Fibonacci's sequence; instead, they are derived from mathematical relationships between numbers in the sequence. The basis of the "golden" Fibonacci ratio of 61.8% comes from dividing a number in the Fibonacci series by the number that follows it.

Using Fibonacci Extensions While Fibonacci retracement levels can be used to forecast potential areas of support or resistance where traders can enter the market in hopes of catching the resumption of an initial trend, Fibonacci extensions can complement this strategy by giving traders Fibonacci-based profit targets. Fibonacci extensions consist of levels drawn beyond the standard 100% level and can be used by traders to project areas that make good potential exits for their trades in the direction of the trend. The major Fibonacci extension levels are 161.8%, 261.8% and 423.6%.