Fibonacci is a tool that measures the size of a price move and subsequently places horizontal support and resistance levels on a price chart. These support and resistance levels are referred to as “Fibonacci levels” and are used to make trading decisions.

The actual calculations of the Fibonacci levels are based on the numbers in the Fibonacci sequence, or rather the percentage difference between them.

The Fibonacci sequence is: 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, … (it goes on this way to infinity). In other words, each term (starting from the third) is a sum of the two preceding ones: 1+1=2, 1+2=3, 2+3=5, 3+5=8 and so on.

Most popular retracement levels used for the forex trading are 38.2%, 50%, and 61.8%. In a strong trend you can expect the currency prices to retrace a minimum of 38.2 percent; in a weaker trend corrections may go as far as 61.8 percent. The 50 % is the most widely monitored retracement level and is a common area to buy in the up trends or sell in the down trends.

fibo-levels

Fibonacci retracements levels are characterized by prices that do not change. This static nature of prices means that traders and investors can count on these tools to anticipate and react wisely once price levels are tested.

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