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What are the Fibonacci numbers?
The so-called Fibonacci numbers were invented by Italian mathematician Leonardo Bonacci (known as
Fibonacci) who lived c. 1170 – c. 1250 and is considered to be the most talented Western
mathematician of the middle Ages. These numbers follow each other in an integer sequence, where
every number after the first two is the sum of the two preceding ones. The sequence of Fibonacci
numbers starts with:
1 , 1 , 2 , 3 , 5 , 8 , 13 , 21 , 34 , 55 , 89 , 144, etc.,
The numbers are calculated as follows:
5=2+3, and so on.
The interesting thing in this sequence is that it appears unexpectedly often in nature, branching in trees,
the arrangement of leaves on a stem, the fruit sprouts of a pineapple, the flowering of an artichoke and
a lot of other phenomena in biological settings follow this pattern.
A lot of traders say that the Fibonacci sequence can also predict future exchange rate levels, so they use
them as technical indicators in trading. Let’s see how these numbers can help you to improve the
profitability of your options trading.
Using the Fibonacci ratios in trading
A series of ratios are calculated from the Fibonacci sequence that can be used as technical indicators.
The most significant Fibonacci ratio is 61.8%, you arrive at it by dividing any number in the sequence by
the number that immediately follows it. You can choose any number in the Sequence; the result will
always be very close to 0.618 that is 61.8%. For example:
8 divided by 13 = 0.615 = 61.5%
13 divided by 21 = 0.619 = 61.9%
21 divided by 34 = 0.617 = 61.7%
61.8% is often referred to as the “golden ratio” or “golden mean”. Traders who believe in this method
think that the Golden Ratio is the most reliable retracement ratio.
The other two Fibonacci Ratios that are significant for forex traders are 38.2% and 23.6%.
The 38.2% ratio is calculated by dividing any number in the sequence by the number found two places to
144 divided by 377 = 0.381 = 38.1%
6765 divided by 17,716 = 0.381 = 38.1%
The 23.6% ratio is derived by dividing any number in the sequence by the number that is three places to
5 divided by 21 = 0.238 = 23.8%
34 divided by 144 = 0.236 = 23.6%
6765 divided by 28,667 = 0.235 = 23.5%
These two ratios seem to have a lower level of success, but are still included in the analysis.
What is a retracement?
Fibonacci retracements are horizontal lines indicating areas of support or resistance in the chart used for
the analysis of exchange rates. Traders first locate the high and low of the chart, then they draw six
lines: at 0% (this is the low on the chart), 23.6% 38.2%, 50%, 61.8%, and 100% (this is the high on the
chart). Fibonacci extensions are also drawn at 161.8%, 261.8%, 423.6%.
These percentages are support and resistance levels where prices may reverse; this is why traders can
use them to predict price movements. After a significant price movement up or down, the new support
and resistance levels may settle near the Fibonacci retracements. If you see that the price is close to this
level, you can expect that it will stop close to it and make use of this information in your trading activity.