(From John person)
Leonardo Fibonacci (1170 – 1240) of Pisa, Italy was a thirteenth century mathematician who discovered that there was a relationship with adding numbers together and then the dividing relationship came up with repetitive percentage figures. This was called the Fibonacci summation or “series” numbers. Simply put, they are an infinite series of numbers that adds each number to the previous. An example is 1,2,3, 5,8,13,21,34,55,89,144, 233, 377, 610, 987 and so on. If you take 1 + 2 you get 3, then if you take 2+ 3 you get 5, and if you take 3 + 5 you get 8 and so on.
Fibonacci ratios are numbers derived from the calculations within the Fibonacci series numbers. The most common numbers are .382%, .50%, .618%, .786%, 1.00%, 1.272% and 1.618%. The “Golden ratio” number is often referred to for the number .618% due to the many coincidences that reoccurs with that number. For example 89=+/- .618 of 144, 144 divided by 233 + .618, .382 + .618 = 1.00, .786 = the square root of .618%.
- Fibonacci correction- also referred to as a retracement, when a market makes a move from a low to a high, price will have a tendency to pullback, retrace or correct. The percentage of the pullback can be .382%, .50%, .618%, .786% and at times even 100%. When looking for bullish set-ups it makes sense that we want to target buying opportunities especially on pullbacks when the market is in an up-trend. This is when we will use a Fibonacci tool to identify the percentage figure and look for that as a potential support to enter a long position.
- Fibonacci extensions - There are times when a pullback can retrace beyond the original starting point and exceed 100 percent of the initial wave or trend. So a Fibonacci extension is essentially a correction that exceeds the low of the initial trend. Technicians will use the 100 percent, 1.272 percent and 1.618 percent ratios to target a pullback level. This state of correction can be considered a double bottom at the 100 percent pullback level, and when we see that correction exceed the low , we see raids on stops. By using the extension tool you may have a great place to place your stops and keep them out of harms way by using the “hidden” or invisible support level as determined by the Fibonacci extension technique.
- Fibonacci projections – this is the term referred to as simply determining a potential price objective and is a vital component in Elliot wave theory. It is an excellent confirmation tool to identify potential trend exhaustion turning points. Using the Fibonacci calculator, one can determine a bullish upside objective by measuring the range of the wave or the swing as it is also referred to. Multiply that sum by the corresponding ratios which are .618 percent, 100 percent, 1.618 percent, 2.618 percent and for extreme moves 3.618 percent. In a bullish trend add that figure to the low, which is the correction low and this will give you the projected price objective. This calculator on my website does this for you automatically.