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Home  >  Technical analysis  >  Trend analysis  >  Forex Fibonacci retracements

# Forex Fibonacci retracements

Fibonacci Retracements are one of the most important forex technical analysis instrument. After making long sustained moves in one direction, many markets retrace a part of the move before continuing on further. The Fibonacci indicator is used to forecast potential support levels and price targets based on the height of the overall move and any wave patterns.

Leonardo Fibonacci, a great mathematician, lived in XI century. He established sequence of natural numbers, later named after him. Each number of the sequence is a sum of two preceding numbers: 1+1=2; 1+2=3; 2+3=5, etc. In the result, the sequence is as follows: 1,2,3,5,8,13,21,34,55,89,144, etc. Fibonacci numbers have certain properties:

• division of the preceding number of the sequence by the subsequent number tends to 0.618 (number of the golden section in Ancient Greek and Ancient Egyptian cultures);
• division of the subsequent number by the preceding number tends to 1.618;
• division of a number by the second preceding number tends to 2.618.

Fibonacci found this relationship of 1.618 to be of great significance and he used it throughout his works. Note the following:

• 0.382 * 1.618 = 0.618
• 0.618 * 1.618 = 1.000
• 1.000 * 1.618 = 1.618
• 1.618 * 1.618 = 2.618

Fibonacci retracement levels are a sequence of numbers discovered by the noted mathematician Leonardo da Pisa during the twelfth century. These numbers describe cycles found throughout nature and when applied to technical analysis can be used to find pullbacks in the currency market.

Fibonacci retracement involves anticipating changes in trends as prices near the lines created by the Fibonacci studies. After a significant price move (either up or down), prices will often retrace a significant portion (if not all) of the original move. Fibonacci retracements use horizontal lines to indicate areas of support or resistance. As prices retrace, support and resistance levels often occur at or near the Fibonacci Retracement levels.

In the currency markets, the commonly used sequence of ratios is 23.6 %, 38.2%, 50% and 61.8%. Fibonacci retracement levels can easily be displayed by connecting a trend line from a perceived high point to a perceived low point. By taking the difference between the high and low, the user can apply the % ratios to achieve the desired pullbacks.

Fibonacci Retracements are displayed by first drawing a trendline between two extreme points, for example, a trough and opposing peak. A series of nine horizontal lines are drawn intersecting the trendline at the Fibonacci levels of 0.0%, 23.6%, 38.2%, 50%, 61.8%, 100% (some of the lines will probably not be visable because they will be off the scale.).

After a significant price move (either up or down), prices will often retrace a significant portion (if not all) of the original move. As prices retrace, support and resistance levels often occur at or near the Fibonacci Retracement levels.