Understand and Use Fibonacci Ratio`s

Understand and Use Fibonacci Ratio`s (part 1)
Basic Ratio by Sunil Mangwani

Fibonacci ratios
• Fibonacci ratios are a very popular tool among technical traders and are based
on a particular series of numbers identified by mathematician Leonardo
Fibonacci in the thirteenth century.
• The Fibonacci sequence of numbers is as follows:
0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, etc.
• Each term in this sequence is simply the sum of the two preceding terms and
sequence continues infinitely.
• One of the remarkable characteristics of this numerical sequence is that each
number is approximately 1.618 times greater than the preceding number.
• This common relationship between every number in the series is the foundation
of the common ratios used in retracement studies.

The Golden ratio The Golden ratio
• The key Fibonacci ratio of 61.8% - also referred to as "the golden ratio" or "the
golden mean" - is found by dividing one number in the series by the number
that follows it. For example: 8/13 = 0.6153, and 55/89 = 0.6179.
• The 38.2% ratio is found by dividing one number in the series by the number
that is found two places to the right. For example: 55/144 = 0.3819.
• The 23.6% ratio is found by dividing one number in the series by the number
that is three places to the right. For example: 8/34 = 0.2352.

Fibonacci ratios in the markets Fibonacci ratios in the markets
• For some reason, these ratios seem to play an important role in the financial
markets, just as they do in nature, and can be used to determine critical points
that cause price to reverse.
• Price has an uncanny way of respecting Fibonacci ratio’s, often quite precisely.
Hence one can use the Fib ratios to ascertain the correct technical levels.
• Frankly there is nothing magical about these numbers, and price reacts at these
levels simply because a majority of traders are following the ratios.

The proper use The proper use
• Another common miss-interpretation of the Fibonacci numbers is that traders
tend to use the same Fibonacci ratio for all kinds of situations.
• Just like the different tools in a carpenter’s tool box, each ratio should be used
in a particular situation.
• While you obviously cannot use a hammer for a job that requires a screw driver,
similarly you cannot use Fibonacci retracements in a situation where the
Fibonacci fans are required.
• Let us have a detailed look at the different Fibonacci ratios and their uses for
the correct situations.
• Using these ratios in a proper way gives us a tremendous advantage over the
crowd.

Fib retracements and projections –
Fib retracements – Fib retracements –
• The basic use of Fibonacci retracements is to find potential levels of support or
resistance “behind” the market. If the market is moving up and making new
highs, Fib retraces will draw levels BELOW the current price.
Ideal situation to use in –
• To estimate the horizontal levels of support/resistance for a pullback in an
existing trend.

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