Trading Academy

Lesson 34

Fibonacci sequence

Fibonacci retracements come from the ratios between the numbers in the Fibonacci sequence. It is a very popular numerical series that appears with regularity in various natural world situations and in mathematics.

The primary Fibonacci numbers are essential to accurately gauge price action and to identify support and resistance levels that provide potential trade opportunities. The most significant Fibonacci retracement percentages are 38.2 percent, 61.8 percent and 76.4 percent. Most trading platforms contain an automatic Fibonacci retracement drawing tool.

Although price action often exceeds the exact price action level where the Fibonacci point, it is very common for reversals to occur shortly after. Sometimes several price bars of consolidation are required before changing trend direction, while in other instances, 2 or 3 price bars are enough to completely reverse and validate the new trend.

The 61.8 percent is probably the most popular Fibonacci retracement percentage that is used by technicians.

Bullish .618 Retracement

Below you can see an example of a bullish impulsive move, followed by a retracement that touched the 61.8% Fibonacci before launching higher again.

Keep in mind: the 61.8% retracement is the most important area to examine for potential support when price is falling, and potential resistance when it is rallying.

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