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|Learn Forex Trading > Day 4 Class > Fibonacci Who?|
We will be using Fibonacci ratios a lot in
our trading so you better learn it and love it like your mother. Fibonacci
is a huge subject and there are many different studies of Fibonacci with
weird names but we’re going to stick to two: retracement and extension.|
Let me first start by introducing you to the Fib man himself…Leonard Fibonacci.
Leonard Fibonacci was a famous Italian mathematician, also called a super duper uber geek, who had an “aha!” moment and discovered a simple series of numbers that created ratios describing the natural proportions of things in the universe
The ratios arise from the following number series: 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144 ……
This series of numbers is derived by starting with 1 followed by 2 and then adding 1 + 2 to get 3, the third number. Then, adding 2 + 3 to get 5, the fourth number, and so on.
After the first few numbers in the sequence, if you measure the ratio of any number to that of the next higher number you get .618. For example, 34 divided by 55 equals 0.618.
If you measure the ratio between alternate numbers you get .382. For example, 34 divided by 89 = 0.382 and that’s as far as into the explanation as we’ll go.
These ratios are called the “golden mean.” Okay that’s enough mumbo jumbo. Even I’m about to fall asleep with all these numbers. I'll just cut to the chase; these are the ratios you have to know:
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 won’t really need to know how to calculate all of this. Your charting software will do all the work for you. But it’s always good to be familiar with the basic theory behind the indicator so you’ll have knowledge to impress your date.
Traders use the Fibonacci retracement levels as support and resistance
levels. Since so many traders watch these same levels and place buy and
sell orders on them to enter trades or place stops, the support and
resistance levels become a self-fulfilling expectation.
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