What are Fibonacci Levels?

By mosesbet · Filed Under Spread Betting Comments Off on What are Fibonacci Levels? 

The Fibonacci sequence is a famous ratio discovered by an Italian mathematician Leanardo Fibonacci which explains the natural proportion of things in the world.

The Fibonacci ratio is bewilderment really and one of the greatest discoveries of scient.  Fibonacci ratios can be used to describe the proportions of anything from the size of people’s faces, bee nests and the universe down to the Forex markets and indices.

If you’ve seen the movie or read the book then you’ll already be familiar with the Fibonacci sequence: 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144 etc…

This sequence is calculated by adding up the previous two numbers (e.g. 55 = 34+21).

The exact science of it all isn’t really important; all you need to know is that the Fibonacci sequence allows us to extrapolate formulas and ratios which can be used in a range of situations or in this case financial markets.  If you measure the ratio between any two succeeding numbers you get .618 or 61.8%.   This is also known as the “golden mean” or the “golden ratio”. If you measure the ratio between any two alternating numbers (e.g. 3 and 8) then you get 0.382 or 38.2%.  These figures can be applied to the markets to understand their movements and the psychology of buyers and sellers.  The total set of Fibonacci numbers are outlined below:

Fibonacci Retracement Levels: 0%, 23.6%, 38.2%, 50% and 100%.

Fibonacci Extension Levels: 0, 38.2%, 61.8%, 100%, 138.2% and 161.8%

Again, it’s not important how exactly we got these numbers but just make sure you learn them (most spread betting platforms and charts will automatically calculate the Fibonacci numbers for you).

How Can Fibonacci Numbers Be Used for Trading?

Traders and spread bettors can use Fibonacci levels to help them find the support and resistance levels, to predict trends using historic candle-stick data, or to find profit levels.  The Fibonacci Retracement Levels are used in combination with Swing Highs and Swing Lows to find the support/resistance levels for a market. The Extension Levels are used for finding profit taking situations to go long with.

In conclusion, Fibonacci Levels are extremely important in helping spread bettors find patterns and buying/selling opportunities in the markets.  The ratios found in the Fibonacci sequence can be applied to the financial markets (almost perfectly) to find support and resistance levels in addition to predicting the movement of the market.  Most Forex and day traders will use Fibonacci indicators to try to explain their trades at specific levles.

 

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