Fibonacci is a series of numbers that you can find in various fields, including trading on financial markets (forex, stocks, etc.).
Fibonacci numbers and the concept of the Golden Ratio
In “Liber Abaci”, Leonardo Fibonacci describes a series of numbers where after 0 and 1. Each number is the sum of the two previous numbers. Thus, the sequence of numbers consists of: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, and so on. In the Fibonacci sequence, each number is approximately 1,618 times more than the previous number.
In mathematics, the number 1.618 is also called Phi, or Golden Ratio; while the opposite is 0.618. This Golden Ratio claims to appear mysteriously in the structure of natural phenomena, architectural, etc.
The traders do not use Fibonacci based on the order of numbers in a row but based on the distance between the numbers in the series.
For example, the number 89 on the Fibonacci sequence, if divided by 144 right after that, will come out the number 0.6180 (61.8%). Furthermore, if you divide the number 89 by the second number after that in the Fibonacci sequence, the number 0.3819 (38.2%) will come out.
Based on these rules, Fibonacci Retracement and Extension levels are obtained. It can surprisingly explain price movements when applied above the price chart. Therefore, Fibonacci is also used in forex trading as a technical analysis tool.
Fibonacci Analysis in Forex Analysis
Fibonacci analysis in forex is mainly based on Fibonacci Retracement. If it widened then Extension will also appear; although there are variations such as Fibonacci Expansion, Fibonacci Fan, and so forth. According to Investopedia, in the early learning session, traders should understand Fibonacci Retracement first.
Fibonacci Retracement and Extension consist of the distance calculation levels of numbers in the series of numbers previously described, plus 50.0% (0.500). Although 0.500 is not based on Fibonacci numbers, you can consider a phase with a high potential for a reversal in Dow Theory and the works of renowned technical expert WD Gann.
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