There
is a special ratio that can be used to describe the proportions of everything
from nature's smallest building blocks, such as atoms, to the most advanced
patterns in the universe, such as unimaginably large celestial bodies. Nature
relies on this innate proportion to maintain balance, but the financial markets
also seem to conform to this 'golden ratio.
Mathematicians,
scientists and naturalists have known this ratio for years. It's derived from
something known as the Fibonacci sequence, named after its Italian founder,
Leonardo Fibonacci (whose birth is assumed to be around 1175 AD and death
around 1250 AD). Each term in this sequence is simply the sum of
the two preceding terms (1, 1, 2, 3, 5, 8, 13, etc.).
Fibonacci retracements is a method of technical analysis for determining support and resistance levels. They are
named after their use of the Fibonacci sequence. Fibonacci retracement is
based on the idea that markets will retrace a predictable portion of a move,
after which they will continue to move in the original direction.
Fibonacci retracement is created by taking two extreme
points on a chart and dividing the vertical distance by the key Fibonacci
ratios. 0.0% is considered to be the start of the retracement, while 100.0% is
a complete reversal to the original part of the move. Once these levels are
identified, horizontal lines are drawn and used to identify possible support and resistance levels.
Fibonacci ratios
Fibonacci ratios are mathematical relationships,
expressed as ratios, derived from the Fibonacci sequence. The key Fibonacci ratios are
0%, 23.6%, 38.2%, and 100%
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