We
will be using Fibonacci ratios a lot in our trading so you better learn it and
love it like your mother. Fibonacci is a huge subject and there are many
different studies of Fibonacci with weird names but we’re going to stick to
two: retracement and extension.
Let me
first start by introducing you to the Fib man himself…Leonard Fibonacci.
Leonard
Fibonacci was a famous Italian mathematician, also called a super duper uber
geek, who had an “aha!” moment and discovered a simple series of numbers that
created ratios describing the natural proportions of things in the universe
The
ratios arise from the following number series: 1, 1, 2, 3, 5, 8, 13, 21, 34,
55, 89, 144 ……
This
series of numbers is derived by starting with 1 followed by 2 and then adding 1
+ 2 to get 3, the third number. Then, adding 2 + 3 to get 5, the fourth number,
and so on.
After
the first few numbers in the sequence, if you measure the ratio of any number
to that of the next higher number you get .618. For example, 34 divided by 55
equals 0.618.
If you
measure the ratio between alternate numbers you get .382. For example, 34 divided
by 89 = 0.382 and that’s as far as into the explanation as we’ll go.
These
ratios are called the “golden mean.” Okay that’s enough mumbo jumbo. Even I’m
about to fall asleep with all these numbers. I'll just cut to the chase; these
are the ratios you have to know:
Fibonacci Retracement Levels
0.236, 0.382, 0.500, 0.618, 0.764
0.236, 0.382, 0.500, 0.618, 0.764
Fibonacci Extension Levels
0, 0.382, 0.618, 1.000, 1.382, 1.618
You won’t really need to know how to calculate
all of this. Your charting software will do all the work for you. But it’s
always good to be familiar with the basic theory behind the indicator so you’ll
have knowledge to impress your date0, 0.382, 0.618, 1.000, 1.382, 1.618