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Time to read: 3 min
June 14, 2021
Fibonacci analysis is the study of determining future support and resistance levels based on previous price patterns and reversals.
Fibonacci analysis is centered on Leonardo Pisano’s mathematical discoveries, also known as Fibonacci. He is credited with discovering the Fibonacci sequence of numbers, which now holds his name.
The Fibonacci sequence is a set of numbers that goes like this: 0,1,2,3,5,8,13,21,34,55,89…… You simply add the two preceding numbers in the sequence to get the next number in the sequence. For example, to determine the number that comes after 89 in a sequence, add the two preceding numbers by 89 + 55. 144 is the result of adding 89 and 55. This is the following number in the series.
The working of Fibonacci Ratio
A Fibonacci retracement is calculated in technical analysis by taking two extreme points on a price graph, typically a peak and a trough, and dividing the vertical distance by the key Fibonacci ratios of 23.6%, 38.2%, 50%, 61.8%, and 100%.
One remarkable feature of this numerical sequence is that each number is nearly 1.618 times larger than the previous number. The framework of the ratios used by technical traders to determine retracement levels is the common relationship between each number in the sequence.
Divide one number in the series by the number that follows it to find the key Fibonacci ratio of 61.8%. 21 divided by 34 equals 0.6176, and 55 divided by 89 equals approximately 0.61798.
The 38.2 % ratio is found by dividing one of the numbers in the series by the number two spots to the right. 55 divided by 144, for example, equals approximately 0.38194.
Divide one number in the series by the number three places to the right to get the 23.6% ratio. For instance, 8 divided by 34 equals approximately 0.23529.
Forecasting Stock Price using Fibonacci Retracement
Traders try to use them to identify critical points in which the price momentum of an asset may be reversed.
Fibonacci retracements are the most frequently used trading equipment in Fibonacci. This is due in part to its relative simplicity and in part to its application to almost every trading instrument. It can be used for the drawing, resistance levels, ‘stop-loss orders’, and ‘target price’ identification. They can be used. In a counter-trading strategy, Fibonacci ratios can even be a primary mechanism.
Fibonacci retracement levels are horizontal lines that show potential support and resistance levels. The above ratios or percentages are associated with each level. It demonstrates how much the price has retracted from a previous move. The course of the previous trend will probably continue. The price of the asset usually goes back to one of the above ratios, however.
The table above shows how a retracement of Fibonacci appears. The most advanced trading platforms have a tool that draws horizontal lines automatically. Please note how price changes when the support and resistance levels are approached
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