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Fibonacci numbers and Technical Analysis

Fibonacci numbers were introduced by the Italian Leonardo Fibonacci in the early 1200. In the Fibonacci sequence of numbers each number equals the sum of the previous two numbers. Here are the first numbers of the sequence: 1,2,3,5,8,13,21,34,55,89,144,233,377,610,987 etc.
In addition any given number of the Fibonacci sequence equals 1.618 times the previous number and 0.618 of the next number.

The Golden Ratio

The number 0.618 mentioned before is commonly known as the Golden Ratio. There are two other important ratios for technical analysis which derive from the Fibonacci sequence: 0.382 and 0.5.

How Fibonacci numbers are used in Technical Analysis

Fibonacci numbers are used in Technical Analysis to determine price support and resistance levels.

1) a 38.2% retracement usually indicates a prior trend will continue,

2) a 50% retracement indicates that a prior trend is possible to continue,

3) a 61.8% retracement indicates the origin of a new prior trend.

TradingCenter (2012)

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