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Fibonacci Retracements

Fibonacci Sequence | by ForexCycle.com | Sunday, 28 December 2008 23:46 UTC

Fibonacci numbers were named after an Italian mathematician called Leonardo Fibonacci. Fibonacci developed the numbers in 1170 when he was carrying out studies on the Egyptian Great Pyramid of Giza. Simply put, Fibonacci numbers are a series of numbers in which the next number in the sequence is obtained by taken a certain number in the sequence and adding to it its predecessor. The number between two numbers in the sequence is the Fibonacci ratio. Such a sequence would look like this: 1, 2, 3, 5, 8, 13, 21, 34, 55 and so on.

The currency market makes frequent use of Fibonacci numbers. We use Fibonacci numbers often to guess the rate trends of assets. Fibonacci studies can be separated into four main groups: time zones, fans, arcs and retracements.

Retracements occur when a given market is rapidly heading in a certain direction. It happens that the market retracts as investors withdraw their earnings. This retraction represents a good time to re-enter the market, since the levels will be very appealing before the market starts growing again.

The magnitude of retracements is usually uniform. Fibonacci ratios of 38.1% and 50% are especially appealing to traders who conduct technical analyses.

We can represent Fibonacci retracements by sketching lines between the low and high peaks, i.e. the highest and lowest points. The trendline is cut through by several horizontal lines at the "fibos" (Fibonacci levels) of 0.0%, 50%, 33.3% with 66.6% or 38.2% with 61.8%, and 100%. When a price increases or decreases considerably, it frequently traces back a large part (or totality) of that increase or decrease. This is called a price retrace and it causes resistance and support levels to appear at the place or close to the levels of Fibonacci retracements.

In addition to price, Fibonacci retracements are also used for time to a lesser extent. The levels of 50%, 38% and 61.8% are the most widely applied in analyses of retracements. At the beginning of a retracement, employing low to high moves, analysts work out and sketch with horizontal lines the three above-mentioned levels. Once the levels of retracements are determined, analysts use them to know where opposing movements will end. A curious fact is that the use of these ratios developed by Fibonacci goes back thousands of years to the time of the Egyptians and the Greeks. In addition to mathematics, they used this ratio, which they called the Golden Mean, in architecture and music.

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