Who was Fibonacci and why do I need to know about him?
Fibonacci was a 12th century mathematician who developed a sequence of numbers and mathematical ratios that repeat in nature. Modern day technical analysis finds these ratios often repeat in forex markets. The Fibonacci sequence is 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144... and so on to infinity. The ratio between any number to the next number is approximately 1.618. The number 1.618 is referred to as the golden mean. If you divide 1 by 1.618 you get 61.8. 61.8 is one of the key ratios found in technical analysis.You are probably scratching your head wondering why any of this is important for you to know. In this article we will discuss how to use Fibonacci ratios in forex trading. Let's first define Fibonacci technical analysis.

Fibonacci retracements defined –A technical tool which plots ratios on a price chart to identify market retracement levels. The key Fibonacci ratios are 23.6%, 38.2%, 50% 61.8%.


There are two key reasons why you should know about Fibonacci ratios:
First, Fibonacci ratios are very popular trading tools used by technical analysts and widely used in foreign exchange markets. Second, currency price movement has an uncanny way of respecting the Fibonacci ratios.

This needs to be repeated, you will be amazed at how often the currency market respects Fibonacci levels.

Don’t fear, all major charting packages will calculate the ratios for you; you just need basic understanding of how to apply Fibonacci technical analysis to your trading. It's worth studying these ratios and learning how to apply them in your trading because many traders use this tool and being aware of what other traders focus on the will help make you a more successful trader.


Why use Fibonacci technical analysis?
Fibonacci is a technical tool based on ratios and is mainly used to identify market retracements. Fibonacci can be used to find support and resistance, place stops and to identify price targets. Ratios found in Fibonacci sequence are often seen in currency price movement.

The basic assumption in Fibonacci analysis- markets price will retrace after a major move.

Fibonacci technical analysis assumes that after an extended price move markets will retrace before the move resumes. You can profit by identifying these retracement levels and trade off the support and resistance levels that are identified by Fibonacci analysis.

How is the retracement created?
The retracement is created by identifying two extremes of prices for a market high and low and drawing the vertical distance of the Fibonacci ratios. Your charting package will calculate Fibonacci ratios for you but you will need to have a basic understanding of how you place the Fibonacci retracement lines. If the market is trending higher, the retracement line will be drawn from 100% to zero. If the market is trending lower, the retracement line will be drawn from 0 to 100%. Once you pick the high and low of the market range for the chart study, the computer will calculate the major Fibonacci retracement levels. As noted above, these retracement levels are.23%, 38%, 50% and 61.8%. The computer will automatically draw horizontal lines at these levels on your chart.

Here is an example of what a Fibonacci retracement looks like on a chart.

Note in the graph below the dark solid black lines were drawn starting on the bottom of the graph at 0% ,the market low, then drawn at the top of the recent market high marked 100%.(See arrows.) You can also see that the charting package has calculated the four key Fibonacci levels for you on the left side of the chart. Note how the market found significant resistance at the 61.8% retracement level.



Here is a summary of the main methods of applying Fibonacci analysis:
There are four primary methods of applying Fibonacci to currency market price action, retracements, arcs, fans and time zones.

Retracements key fib ratios and extensions
There are two key components of Fibonacci technical analysis that you need to understand, first as noted above market price action after big move will tend to retrace to support and resistance at key Fibonacci levels. The second, Fibonacci can be used to measure price extensions.

Here is another example of the key Fibonacci ratios in the graph below



As you can see from the computer has drawn horizontal lines from 0 to 100% and calculated the key Fibonacci ratios. Note how the market price action respected the various levels marked by the horizontal lines and the Fibonacci ratios.

The next example shows how Fibonacci ratios can be used to measure price extensions beyond 100%.



In the chart above the computer calculates the 161.8 Fibonacci ratio measuring the target from the 100 percent breakout. The target is calculated by multiplying the vertical distance of the triangle by 61.8 and adding it to the upper resistance of the triangle. Fibonacci extensions can be used to set a price target.

Fibonacci arcs
The arcs are applied by finding the high and low currency price action. The compass like movement can be set which creates 3-D curved lines drawn at 38.2% and 61.8% levels. Once again, look to use these levels to find support resistance where price levels hit the arc.

Here is an example of what Fibonacci arcs look like.



Fibonacci fans
Fibonacci fans are made up of tag lines. First locate the high and low on the chart, an invisible vertical trendline is drawn to the farthest right point on the chart. The invisible line is divided by the Fibonacci ratios of 38.2, 50% 61.8%. The lines are taken from the farthest left point chart.

Here's an example of Fibonacci fans



Fibonacci time zones
The main difference in the application of Fibonacci time zones is the use of vertical lines as opposed to the horizontal lines that we've been drafting above. The chart is divided into segments with vertical lines in increments that conform to the Fibonacci sequence. These lines are used to indicate potential for major price moves.

Here is an example Fibonacci time zone analysis



This seems like a lot to grasp but the most important thing to take away from this article is to know the key Fibonacci numbers. The key Fibonacci retracement numbers that you should be most aware of are 38.2, 50% and 61.8%. You do not have to do the mathematical calculations yourself. All major charting packages will draw the Fibonacci ratios for you. You should know how to use Fibonacci levels and the primary methods of applying Fibonacci analysis to currency price charts. Fibonacci often works and this can increase your chance of making profitable trading decisions.


Test your knowledge

1. Fibonacci is popular technical trading tool used to measure market ________.
1. retracements
2. support
3. resistance
4. market extensions
5. all of the above


2. Key Fibonacci retracement levels are ____, ______ _____ and,_____.
1. 23, 38%, 50% and 61.8%
2. 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144...
3. 0, 10 20 30 40,


3. True or false
   If the market is trending higher the retracement line will be drawn from 100% to zero. If the market is trending lower, the retracement line will be drawn from 0 to 100%.


4. If a market trades above 100% retracement you can use Fibonacci to measure a market ________.
1. reaction
2. extension
3. breakout
4. retracement


5. True or false
   The four primary methods of applying Fibonacci to currency market price action are retracements, arcs, fans and time zones.

1. e, all of the above
2. a, 23, 38%, 50% and 61.8%
3. True
4. b, extension
5. True