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Fibonacci Retracements
Fibonacci numbers are used frequently in hypothesizing which rates assets will gravitate towards. Namely, there are four popular Fibonacci studies: arcs, fans, retracements, and time zones.
The use of Fibonacci numbers is widespread in the currency market.
In 1170 AD a mathematician by the name of Leonardo Fibonacci discovered the relationship of what are now referred to as Fibonacci numbers while studying the Great Pyramid of Gizza in Egypt. The Fibonacci ratio exists between any two successive numbers in the Fibonacci sequence. Fibonacci numbers are a sequence of numbers in which each successive number is the sum of the two previous numbers: 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, etc.
When a market is moving swiftly in a given direction, it may sometimes pull back as market participants take their profits. This phenomenon is known as retracements and will usually create good opportunities to re-enter the market at attractive levels before the move resumes.
Retracements are often of similar size, and 50% and 38.1% retracements in particular (Fibonaccio ratios) enjoy considerable attention among technical traders.
Fibonacci retracement is displayed by drawing lines between two extreme points, a high and (opposing) low peak. A series of horizontal lines will be drawn intersecting the trend line at the Fibonacci levels of 0.0%, 38.2% with 61.8% or 33.3% with 66.6%, 50%, and 100%. After a significant price move (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.
In general, they can be applied both to price and time, although it is more common to use them on prices. The most common levels used in retracement analysis are 61.8%, 38% and 50%. When a move starts to reverse the 3 price levels are calculated (and drawn using horizontal lines) using a movements low to high. These retracement levels are then interpreted as likely levels where counter moves will stop. It is interesting to note that the Fibonacci ratios were also known to Greek and Egyptian mathematicians. The ratio was known as the Golden Mean and was applied in music and architecture. A Fibonacci spiral is a logarithmic spiral that tracks natural growth patterns.