While most attribute the Fibonacci Sequence to Leonardo, he was not responsible for discovering the sequence. In 1202 Leonardo published a book called, Liber Abaci. In it he derived a method for calculating the growth of the rabbit population.

This mathematical progression is now recognized as the Fibonacci Sequence. Starting with zero and adding one, each new number in the sequence is the sum of the previous two numbers. In our example, 0+1 = 1, 1+1=2, 1+2=3, 2+3=5 so on.

Fibonacci as a Technical Analysis Tool

While there have been countless books and articles written on the use of Fibonacci in technical analysis, the basics are simple.

On the price scale, these ratios, and several others related to the Fibonacci sequence,often indicate levels at which strong resistance and support will be found. Many times, markets tend to reverse right at levels that coincide with the

Fibonacci ratios. On the time scale Fibonacci ratios are one method of identifying potential market turning points. When Fibonacci levels of price and time coincide you have high probability entry points.

In the next few pages I will talk about how I use the two most common applications of Fibonacci:

Price Retracements – Astrategy for quality entry points

Price Extensions – A approach to determing how far price will run

Then after we have convered the basics we will talk about bring it all together and using both Fibonacci Retracement and FibonacciExtensions at same time and how clustering of these ratios increases the probability of profit.

While there are many variations of the ratio set, simple is better, let’s focus on four major retracement levels.

23.6%–The shallowest of the retracements.In very strong trending markets price typically quickly bounces in the area of the ratio.

38.2%–This is the first line of defense of the current trendf.Breaking this level starts to erode the underlying trend.

50%–The neutral point of any retracement.This is the critical tipping point.

61.8%–retracing to this typically signals a breaksdown in the trend.

100%–Matching the move.

138.2%

161.8%

200%

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