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| Fibonacci Retracement Levels |
🙋♂️Hello dear readers, today the topic of our article is the
Fibonacci sequence frequently used by traders in technical analysis. In this
article, we will try to answer the following questions:
❓ What is the Fibonacci sequence?
❓ Why is it called the Fibonacci sequence?
❓ Where is the Fibonacci sequence used?
❓ How is the Fibonacci Series used in the financial market?
What is the Fibonacci sequence? 🤷♂️
Let's start with the first question. In the Fibonacci
sequence, each number is formed by adding the two preceding numbers. 👀Let's take
an example:
0, 1, 1, 2, 3, 5, 8, 13, 21, ... In this infinite series,
each number is equal to the sum of the two numbers that come before it.
2 = 1+1; 3 =
2+1; 5 =
3+2; 8 =
5+3; 13 =
8+5; 21 =
13+8.
The Fibonacci sequence typically starts with 0 and 1, but it
can also start with any other number. 👀For example:
7, 7, 14, 21, 35, 56, 91, ...
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| Giovanni Paganucci's Monument of Leonardo da Pisa (Fibonacci), erected in 1863 within the Camposanto of Pisa.Source: Wikipedia |
Why is it called the Fibonacci sequence?
🕵️♂️The Fibonacci sequence was discovered by Leonardo Fibonacci,
a famous Italian mathematical genius. He encountered these numbers while
investigating a problem related to the breeding of a rabbit population in a
closed environment during the 13th century. 📗In his book titled "Liber
Abacci," he explains the theory of the "golden ratio" and
discusses how this series of numbers can be used to solve problems. The book
also provides explanations of the mathematical properties and connections of
the numbers that form the sequence. The name "Fibonacci sequence" is
derived from Leonardo Fibonacci's own surname and is given in reference to him.
👨🏫Where is the Fibonacci sequence used?
When we divide consecutive numbers in the Fibonacci
sequence, the result tends to approach the value of 0.618 (approximately),
while dividing a number by its preceding number yields a result close to 1.618
(approximately). These special ratios are known as the "Golden Ratio"
and are derived through the Fibonacci number sequence. We can observe the
traces of the Golden Ratio in various aspects of life and nature. For example,
the numbers obtained by counting the seeds from the center of a sunflower and
spiraling outwards in both clockwise and counterclockwise directions, the ratio
between our index finger and the previous joint, and so on.
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| A visual representation of how the Golden Ratio and Fibonacci numbers create a harmonious balance seen in the growth patterns of plants like the sunflower. |
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| Highlighting the Golden Ratio and Fibonacci numbers in natural forms, including human finger joints. |
Fibonacci series is used in many fields, and below we have
listed the most well-known applications:
🌼Biology. Fibonacci numbers and ratios are encountered
in natural formations such as branching patterns of plants, leaf arrangements,
and flower structures. This can reflect the mathematical organization in the
growth and development processes of plants.
➗Mathematics. The Fibonacci series has an important
role in mathematical analysis and number theory. It is used in problems related
to number theory and the exploration of the golden ratio.
🎨Art and Design. The Fibonacci series finds many
applications in art and design. The golden ratio is considered aesthetically
pleasing, and proportions, designs, and compositions are created based on the
relationships with Fibonacci numbers.
💻Programming and Data Structures. The Fibonacci series
can be used in the field of data structures, algorithm design in programming,
and pattern recognition problems. It is possible to write a program that
calculates the Fibonacci series and create algorithms based on Fibonacci
numbers. There is a data structure called the Fibonacci heap, which is based on
the Fibonacci series.
💰Finance. The Fibonacci series is used in technical
analysis in financial markets. Fibonacci retracement and Fibonacci extension
levels are used in the analysis of price charts to determine support and
resistance levels.
How is the Fibonacci Series used in the financial market?
Numbers in the Fibonacci sequence exhibit special
proportional relationships with each other. These ratios are 0 percent, 23.6
percent, 38.2 percent, 61.8 percent, 78.6 percent, and 100 percent. While
traders don't have a direct relationship with the Fibonacci sequence, they
believe that the ratio of 50 percent is also significant in the Fibonacci
indicator, and therefore, they use this ratio. On your trading platform, you
can perform analysis using various tools under the Fibonacci toolbar.
Fibonacci Retracement.
Fibonacci retracement levels are applied in both upward and
downward trending charts. To apply Fibonacci retracement levels, you need to
identify the highest and lowest points within a specific time period on a price
chart of an asset. In an upward trend, the lowest point (bottom) will be 1,
which corresponds to 100 percent, and the highest point (top) will be 0, which
corresponds to 0 percent. After selecting the Fibonacci Retracement tool, you
can draw from the bottom to the top using the mouse cursor, and the mentioned
ratios will be applied to the chart.
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| Fibonacci Retracement on a GBP/AUD price chart |
The Fibonacci lines on the chart representing the GBP/AUD
price indicate potential resistance and support levels. These levels can also
be used to determine entry and exit points and to set stop-loss levels. Traders
can consider Fibonacci retracement levels in an upward trend to make buy
entries or determine stop-loss levels. Additionally, the Fibonacci indicator
can be used to identify extension levels, which show how high an asset can rise
after a corrective move.
Let's now see how it is used in a downtrend. In a downtrend,
the situation will be reversed. The highest point will be 1, and the lowest
point will be 0. This time, we will draw from the peak to the bottom, instead
of from the bottom to the peak. Let's take a look at the example below:
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| Fibonacci Retracement on an AUD/USD price chart |
As you can see in the AUD/USD chart, the price is getting
stuck at support and resistance levels several times. Traders can use this tool
in a downtrend not only to determine retracement levels but also to identify
extension levels, which can help predict how far the price of the asset may
decline after a correction.
Fibonacci Time Zones⏱
Fibonacci time intervals are used to predict the time
durations at which price movements within a specific time frame can reach
significant points such as corrections or trend reversals. Fibonacci sequences
are important tools used in financial analysis not only for analyzing price
changes but also for analyzing time intervals. The numbers in the Fibonacci
sequence represent the intervals between trend days, considering each number as
a day. These numbers provide valuable information to analysts in determining
the duration of fluctuations.
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| Fibonacci Time Zones on NZD/USD price chart |
The Fibonacci sequence is obtained by adding consecutive
numbers together, and the ratios between the numbers are used to determine time
intervals. For example, Fibonacci numbers like 1-1-2-3-5-8-13-21-34 are
analyzed by dividing them into trend day intervals. This analysis method
provides investors and analysts with clues about how long price movements may
last.