Fibonacci retracements is an important and interesting tool used by technical traders in stock markets around the world. It is a number theory-driven metric that can help traders analyze the buy and sell points of specific stocks. Fibonacci retracements are based on the designated Fibonacci numbers and associated Golden Ratio. Fibonacci was the first man to notice this sequence and its curious coincidences. The ratio of 1.618 is known as the ‘Golden Ratio’. It is found everywhere in nature. From galaxy formations to the ideal proportions of a human face in art, to the construction of a DNA molecule, everything reflects this ratio. Fibonacci retracement levels are lines on a graph at which a stock’s potential buy and sell values, or resistance and support price levels, are drawn. In technical stock trading, these lines are set at 23.6%, 38.2% and 61.8%. It is worth noting that even these values form a Fibonacci sequence. The Fibonacci sequence provides the information need to formulate support and resistance levels which can be used within your risk management framework.
Key Fibonacci ratios
Fibonacci analysis involves four key ratios: 23.6%, 38.2%, 50%, and 61.8%.
They are based on the work of Italian mathematician Leonardo Pisano Bogollo. Bogollo introduced the Fibonacci sequence, which is a sequence of numbers that extends to infinity and has some unique properties. The sequence goes as follows:
0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987……
Fibonacci Retracements are displayed by first drawing a trend line between two extreme points. A series of six horizontal lines are drawn intersecting the trend line at the Fibonacci levels of 0.0%, 23.6%, 38.2%, 50%, 61.8%, and 100%.
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