Leonardo Pisano Bigollo was born around 1170 in Italy, also known as Leonardo Fibonacci. This Italian mathematician presented the Fibonacci sequence for the Western world in his book Liber Abaki. What is interesting, this sequence was returned to Indian mathematicians in six centuries. Here we going to discuses Fibonacci The Basic Understanding for new and experience traders.
The Fibonacci sequence is present in many different areas, such as math, nature (spiral of shells or tree branches) and, of course, in Fibonacci trading.
Fibonacci The Basic Understanding
The sequence of Fibonacci numbers are: Beginners, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 337, 610, 987 …
They are called Fibonacci sequence or Fibonacci series.
Each number is the sum of two previous numbers (two to the left).
See number 3. This is the sum of numbers 2 and number 1, because 2 and 3 are on the left side.
On the left side of 34 is two numbers 21 and 13. Therefore, we add results 21 to 13 and the result 34.
The answer is where Fibonacci numbers came from. Each Fibonacci number has its own place in the sequence. The Fibonacci sequence is the basis for calculating other Fibonacci numbers, such as ratio or extension.
Fibonacci Retracement and Fibonacci Ratios
Based on the sequence, we can calculate Fibonacci ratios and Fibonacci levels. The Fibonacci ratios are calculated by dividing a number from that sequence which follows it in the sequence. Let’s take a look at some Fibonacci levels:
5/8 = 0.625
13/21 = 0.619
89/144 = 0.618
Listed final ratio: 61.8% is the most important proportion and it is often called golden ratio. But there are more ratios, as you have seen. Where do other ratios come from? The answer is simple: it is the result of splitting the vertical number on the two, three and four places to the right.
For example, from 8 to the right, two places are 21:
8/21 = 0.38
8 to 3 place is 33:
8/33 = 0.24
Here we have their most important proportion: 23.6%, 38.2%, 61.8%.
A ratio is also called a retreatment level or Fibonacci level. This is because because there is a chance that one price will stop at one of those levels and will be reverse.
Traders prefer to use more of some Fibonacci levels, so the list of the most popular full retracement levels is as follows:
23.6%, 38.2%, 50%, 61.8%, 78%
The 50% retracement level does not come with the Fibonacci sequence, but it is an important level. Trader’ reaction is when a price level is near half of the previous swing, so they added it at the retracement level.
So, with the help of Fibonacci ratios, we get the Fibonacci level.