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In technical analysis, Fibonacci retracement is created by taking two extreme points (usually a major peak and trough) on a stock chart and dividing the vertical distance by the key Fibonacci ratios of 23.6%, 38.2%, 50%, 61.8% and 100%. Once these levels are identified, horizontal lines are drawn and used to identify possible support and resistance levels.
The Fibonacci sequence of numbers is as follows: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, etc. Each term in this sequence is simply the sum of the two preceding terms and sequence continues infinitely. One of the remarkable characteristics of this numerical sequence is that each number is approximately 1.618 times greater than the preceding number. This common relationship between every number in the series is the foundation of the common ratios used in retracement studies.
The key Fibonacci ratio of 61.8% – also referred to as “the golden ratio” or “the golden mean” – is found by dividing one number in the series by the number that follows it. For example: 8/13 = 0.6153, and 55/89 = 0.6179.
The 38.2% ratio is found by dividing one number in the series by the number that is found two places to the right. For example: 55/144 = 0.3819
The 23.6% ratio is found by dividing one number in the series by the number that is three places to the right. For example: 8/34 = 0.2352.
Fibonacci retracement use horizontal lines drawn at golden ratios in percentage (38.2% and 61.8%) to identify support and resistance.
It is the horizontal lines with ratio of 38% and 62% used to identify support and resistance.
n trending market, the fibonacci number sequence can be used to forecast on the likely depth of the retracement positions in the trend and will hint on where the correction can likely to happen. The fibonacci ratios and analysis can be used in addition to the technical analysis to confirm the outcome of the analysis but can not be used as stand alone tool.
Fibonacci series: 1,1,2,3,5,8,13,21,34,55,89,144,233,.. The most often used ratios are 61.8( which is the ratio with next no, 144/233, 89/144), 38.2(the ratio with one number forward 89/233,55/144 etc) and the medium value of 50. When a straight line is drawn between previous bottom and top and it is considered as 0 and 100%. When the trend is bullish, the resistance is likely to happen at the 38.2 or 50 or at 61.8 % levels for retracement and then the trend will continue in the forward direction. Similarly in bearish trend, the support zone likely to appear at 38.2 or 50 or at 61.8% level from initial low/high positions for retracements. This can be used for all the timelines(daily, monthly, weekly) analysis but along with other analysis.
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