We are not talking about magic numbers, that can unlock all markets and allow you to make a lot of money, but Fibonacci sequence is very popular among traders.
Many investors and traders don’t know or don’t use Fibonacci sequence in their trading. Fibonacci technical analysis is more prevalent among active investors and day traders who transact daily on the basis of technical analysis. Fibonacci sequence is used as one of the tools of technical analysis with which you can easily predict the future movement of prices. With it, you will not be rich, but understanding it will help you with your day trading and with better performance on financial market.
Many day traders swears on trading with Fibonacci sequence because it is suppose to be one of the most reliable models of technical analysis. With the help of this model, which is based on the observation of nature, traders can easily provide the support and resistance levels.
Fibonacci technical analysis is based on the key number identified by mathematician Leonardo Fibonacci in the 13th century. Fibonacci’s model or correction is based on two extreme points, which define the top and the bottom of the graph. The vertical distance is delimited with Fibonacci’s numbers 23.6 percent, 38.2 percent, 50 percent, 61.8 percent and 100 percent. With these numbers traders draw a horizontal line that is used to determine potential support and resistance levels.
The Fibonacci sequence of numbers is: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144,… Each number in Fibonacci sequence is the sum of the previous numbers and goes to infinity:
0 + 1 = 1
1 + 1 = 2
1 + 2 = 3
2 + 3 = 5
3 + 5 = 8
5 + 8 = 13
8 + 13 = 21
21 + 13 = 34
The specific feature of this sequence is, that each number is approximately 1,618 times bigger that previous. So the number 0.618 and 61.8 percent is considered as golden number of Fibonacci technical analysis.
- number 23.6 percent you get by dividing the number to a number which is three places to the right: 34/144 = 0.236
- number 38.2 percent you get by dividing the number to a number which is two places to the right: 34/89 = 0.382
- number 61.8 percent you get by dividing the number to a number which is one place to the right: 34/55 = 0.618
In addition to these numbers many Fibonacci sequence users also use levels at 50 percent and 78.6 percent. Fibonacci numbers play an important role in the markets, as it applies, that direction of the original trend will continue, when there will be a correction in prices on one of the Fibonacci levels.