IT HAS BEEN FOUND THAT THE APPLICATION OF FIBONACCI SERIES HAS A VERY GOOD IMPACT ON PRICE MOVEMENT & PRICE ACTIVITY IN TRADING SEGMENT. THE RETRACEMENT VALUES OBTAINED FROM FIBONACCI SERIES PLAYS A MAJOR ROLE HERE.
SO WHAT IS A FIBONACCI SERIES ?
A Fibonacci sequence is formed by taking two numbers, any two numbers, and adding them together to form a third number.Then the second and third numbers are added again to form the fourth number and so on.
The series would look like this :
0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144…
Each number is approximately 1.618 times greater than the preceding number.This ratio is called the golden ratio.
After the first few numbers in the sequence, if you measure the ratio of any number to the succeeding higher number, you get 0.618.
If you measure the ratio between alternate numbers you get 0.382.
This common relationship between every number in the series is the foundation of the ratios used by technical traders to determine retracement levels.
In Technical Analysis we use Fibonacci Retracement in different ways when looking at the price action of an instrument on a chart.
Support and resistance play an integral part of trading and the Fibonacci levels will guide you to where these levels might be. You can use these levels for support, resistance, entry, exit, profit or stop levels as part of your trading plan.
0% is the starting point and 100% will be the end.
The 23.6% Fib level is derived by calculating any number in the sequence divided by the third preceding number.
The 38.2% level is calculated by any number in the sequence divided by the second preceding number.
The 61.8% retracement level which is calculated by dividing one number in the series of Fibonacci sequence numbers by the number that follows it the for example 8/13 = 61.8% (which is the “golden ratio”).
The midpoint or 50% Fib retracement is not a Fibonacci ratio but a standard retracement level.
Fibonacci retracement levels are horizontal lines that indicate the possible support and resistance levels where price could potentially reverse direction.
The theory is that after price begins a new trend direction, the price will retrace or return partway back to a previous price level before resuming in the direction of its trend.
Fibonacci retracement levels are considered a predictive technical indicator since they attempt to identify where price may be in the future.
In order to find these Fibonacci retracement levels, you have to find the recent significant Swing Highs and Swings Lows.
Then, for downtrends, click on the Swing High and drag the cursor to the most recent Swing Low.
For uptrends, do the opposite. Click on the Swing Low and drag the cursor to the most recent Swing High.