What are Fibonacci Numbers?

What are Fibonacci Numbers?

Leonardo Fibonacci

Fibonacci numbers or lines are a continuous series of numbers where the next following number is the total of the two earlier numbers which, go on infinitely. The Fibonacci sequence of numbers are 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89 and so on. These numbers were discovered by Leonardo Fibonacci a famous mathematician from Pisa, Italy and these sequential numbers were named after him – the Fibonacci Sequence.

Below shows the calculations of how the Fibonacci sequence of numbers come about:

0 plus 1 = 1, 1 plus 1 = 2, 1 plus 2 = 3, 2 plus 3 = 5, 3 plus 5 = 8, 5 plus 8 = 13, 8 plus 13 = 21 and so on.

One interesting fact of these sequential numbers is that the ratio of these two successive numbers is always approximately 1.618034 (1:1.6) and the bigger the pairs, the closer the approximation. These ratios are called the ‘golden ratio’ or the ‘golden mean’.

The ratio of 61.8% derives from the calculation of any number in the series divided by the next following number on the right. For instance, 21 divided by 34 equals 0.618 and in percentage is 61.8%

The ratio of 38.2% derives from the calculation of any number in the series divided by the next following number located two places to the right. For instance, 21 divided by 55 equals 0.618 and in percentage is 38.2%

These ratios seem to play an important part in many fields such as in forex market, in nature, in architectural designs and so forth. In forex, these ratios are used to decide crucial points or levels that cause a currency price to reverse and advance. In this respect, a very popular technical tool called the Fibonacci Retracement Levels was created, including the Fibonacci Extension Levels.

Fibonacci Retracement Levels or Chart

These set of numbers 0, 0.236, 0.382, 0.500, 0.618, 1.000 represent the Fibonacci Retracement Levels and these set 0, 0.382, 0.618, 1.000, 1.382, 1.618 represent the Fibonacci Extension Levels.

Referring to the ratios mentioned above, if you are to calculate the retracement level of 50% or 0.500 you will find that it is actually not a Fibonacci ratio. It is being used as the currency price tends to continue in a particular direction the moment it touches the 50% retracement level.

You need not have to calculate or remember all these numbers as they are already provided in your trading platform or chart when you open a trading account with your broker. All you have to know is the basic theory of how the indicators come about.

The Fibonacci retracement levels are used by many traders as a support and resistance areas. They monitor these levels before entering or exiting their trades. As for the Fibonacci extension levels, traders used them as a profit taking levels.

Before using these two Fibonacci levels, you should first of all learn to identify and understand the Swing High points and the Swing Low points.

A swing high is a peak or top where the currency price has climb up and then drops back
down creating an upside down letter V. A swing low is a valley or bottom where the currency price has drop down and then climbs back up creating a letter V. Like any other indicators, both can also be used to pin point the support and resistance areas including the stop-loss order positions.