Fibonacci, also named Leonardo Pisano born in Pisa in 1170 and he was an Italian mathematician. GuglielmoBonacci the father of Fibonacci worked in Bugia at a trading post. He studied mathematics in Bugia as a young man, and he learned about the Hindu-Arabic numeral systems advantage. And he knew all through his extensive travels. His hard work has led to the inventions of Fibonacci series which is widely used in the retail trading industry.
The Golden Ratio
In 1202, Fibonacci documented his learning into “Liber Abaci”. In “Liber Abaci,” he described the whole numerical series, and the series is now named after him. At this Sequence of Numbers, every number is the two preliminary numbers sum after 0 to 1. Hence the sequence extending to infinity following the sequence 0,1,1,2,3,5,8,13,21 and so on. The difference between each number is 1.618. That is, each number is 1.618, greater than the previous number.
1.618, this value is known as “Golden Ratio” or called Phi. Mysteriously in the natural world, fine art, architecture, and biology, the “Golden Ratio” appears frequently. Based on this golden ratio, we have the Fibonacci retracement tools which is widely used in trading profession.
Financial Markets Use the Fibonacci Level
The numbers used in retracements are different from the numbers at Fibonacci’s sequence in the trading context. This is because the sequence has derived from the line and numbers of mathematical relationships. For example, 61.8 percent of its golden ratio basis comes from dividing Fibonacci series numbers by the following number. To get more info about the Fibonacci retracement tools, you may use a demo account from Saxo, this will give you a better picture of the market.
The retracement levels in the Fibonacci retracement tools has derived from the complex mathematical calculation. For instance, the ratio of 38.2 has derived from dividing the series number by the two places number to the right. Again, for example, 89/223=0.3819. The balance of 23.6 percent derived from dividing the series number by the three places number to the right.
On a chart taking the low and high points, we can depict the retracement level, and a grid can produce by making the ratios of 38.2%, 23.6%, and 61.8%. The possible price reversal points become identified from the horizontal lines.
The grid levels usually include the 50 percent retracement level and the charting software, and we can draw this grid. However, the retracement level of 50 percent has not based on the number of it. Instead, widely it is viewed as a crucial possible reversal level. This significant reversal level was recognized notably in the Dow Theory and also in W.D. Gann’s work.
Using Fibonacci Extensions
The potential support or resistance areas can forecast by using the retracement levels. However, in these areas, the traders enter the market in the hope of adjusting to the initial trend. Fibonacci extensions by giving traders the profit based on the targets can complement this strategy.
The traders can use its extensions to the project areas, and it can draw beyond the 100 percent standard level. However, this extension creates the excellent potential for the trades within the trend direction. 161.8 %, 261.8%, and 423.6% are the primary extension levels of it.
Uncanny accuracy, along with its reversal points, is often known as the retracement levels. However, in retrospect, they look easy to trade, but they are harder to change in reality compared to hindsight.
Within a broader strategy, these levels are used best as a tool. Ideally, this is one of the strategies by which several indicators confluence to identify the potential reversal areas. All these potential areas offer high potential and low risk to the trade entries.
These trading tools, just like the other trading strategies, are going to suffer from the exact problems. However, using its ratios, many traders find success, and for the long-term price trends, they use retracements to place transactions. Fibonacci retracement, when used in conjunction with technical signals or other indicators, can act more powerfully.