Named after 13th century mathematician Leonardo Fibonacci, the Fibonacci numbers are the numbers in an integer sequence in which each number is the sum of the previous two. The sequence is closely related to the golden mean and its ratios are to be found in many places in nature; from shell spirals and tree branches to the human body’s appendages and joints.
In technical analysis, the Fibonacci retracement refers to areas of support and resistance represented with lines drawn on an asset’s price chart in order to discern the Fibonacci relationship thought to exist in asset price fluctuations. These are drawn according to the Fibonacci ratios of 23.6%, 38.2%, 50%, 61.8% and 100%.
In order to apply them to your trading, select Fibonacci retracements from your terminal and draw a line from a recent lowest low to a recent highest high (or vice versa depending on whether the market is bullish or bearish) and your platform will automatically plot the ratios for you between these two points. Fibonacci retracements work best when plotted on strongly trending markets. When drawn from low to high levels, it indicates retracement support levels in which the price may pull back and thus generates buy signals for traders. When drawn from high to low levels, it indicates retracement resistance levels in which the price may momentarily spike back and thus generates sell signals for traders. It is thought that one of the reasons Fibonacci retracements seem to work so well as a predictive tool has more to do with the levels being self-fulfilling due to the fact that many investors are observing them and not because there is an essential mathematical ratio that defines price movement.