Learn Fibonacci

We will often use Fibonacci ratios in our trading, so should you learn Fibonacci and loved it. Fibonacci is a very broad subject and there is so much to be learned from Fibonacci with weird names, but we will only study the two, there are: retracement and extension.

First let us know the Fibonacci maker: Leonard Fibonacci. Leonard Fibonacci was an Italian mathematician. He found a simple series of numbers that make up the ratio describing the natural proportions of a thing in this world.

This ratio is derived from the sequence of a series numbers: 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144 ... The sequence of a series numbers comes from the number 1 followed by 2 and then the sum of 1+2 to get 3, the third numer. Then add 2+3 to get 5, the fourth number, and so on.

After some initial sequence of series number, if you calculate the ratio of any number with the next higher number it will get 0.618. For example, 34 divided by 55 equal to 0.618. If you calculate the ratio between some number with the two next higher number, it will get 0.382. For example, 34 divided by 89 equal to 0.382 and so on.

This ratio is called the "golden mean". And we just need to know the following ratios:

Fibonacci retracement Levels

0.236, 0.382, 0.500, 0.618, 0.764

Fibonacci Extension Levels

0, 0.382, 0.618, 1.000, 1.382, 1.618

You do not need to know how to get these numbers. Chart in trading software will do it for you. But it never hurts to know the basics of the calculation, for additional knowledge.

Many traders use the Fibonacci retracement levels as support and resistance levels. Since there are many traders who use the same support and resistance levels and make buy and sell orders at that level to enter trade position or place stop, so support and resistance levels become an expectation.

Traders use the Fibonacci extension levels as profit taking levels. And once again, since many traders pay attention to this level and open buy and sell for a profit, then it will also become an expectation.

Many charting software that includes Fibonacci retracement level and extension level tool. To use the Fibonacci levels to your charts, you need to identify Swing High and Swing Low point. Swing High is a candlestick with a minimum of two lower high both on the left and right.