Fibonacci retracements hypothesize
This technique is very similar to using speed resistance lines. Fibonacci numbers are frequently used to hypothesize which rates particular assets will gravitate towards. Use of these numbers is widely accepted in the currency market. There are four popular types of Fibonacci studies, arcs, fans, retracements and time zones.
In 1170 A.D., Leonardo Fibonacci a mathematician, discovered the relationship that is now referred to as the Fibonacci numbers while he was studying the Great Pyramid of Gizza, in Egypt. The Fibonacci ratio exists between any two successive numbers in the Fibonacci sequence. The numbers are a sequence of numbers for which each successive number is the sum of the two previous numbers. For example: 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233 etc.
When the market is moving rapidly in any given direction, it sometimes experiences breaks where investors simply hold on to their profits. This phenomenon is known as retracements and generally creates good opportunities for investors to re-enter the market at some attractive levels before the move resumes. Retracements are usually similar in size. Technical traders in particular, pay considerable attention to retracements that are at the Fibonaccio ratios of 38.1% and 50%.
Fibonacci retracement is displayed by drawing lines between an extremely high peak and an opposing extreme low peak A series of horizontal lines are drawn to intersect the trend line at the Fibonacci levels of 0.0%, 38.2% with 61.8% or 33.3% with 66.6%, 50%, and 100%. When a significant price move occurs, either up or down, the prices will often retrace a significant portion of the original move; sometimes prices will trace the exact move. As prices retrace their steps, support and resistance levels will often occur at or near the Fibonacci retracement levels.
While retracement levels can be applied to both the price and the time, they are more commonly used to determine price. The most common levels used in retracement analysis are 61.8%, 38% and 50%. As a market move starts to reverse, the three levels are calculated by drawing a horizontal line from low to high. It is interesting to note that the Greek and Egyptian mathematicians also knew about the Fibonacci ratios. The ratio known as the Golden Mean was applied in both music and architecture. A Fibonacci spiral is a logarithmic spiral that is used to track patterns of natural growth.