Leonardo Fibonacci

• Sphinxes, Pyramids & Pharaohs.

• What do these have to do with the financial markets?

• In the early 1200's, the Italian mathematician Leonardo Pisano Fibonacci

uncovered a secret about this ancient civilization that would revolutionize the
entire mathematical world... including the financial markets!

• While studying the Great Pyramid "Gizeh" in Egypt, Fibonacci made a startling
discovery and uncovered a unique mathematical sequence of numbers that
changed several theories of trigonometry, algebra & geometry.

• He developed the famous Fibonacci sequence of numbers, which has become the
foundation of many effective trading systems.

• Now these Fibonacci numbers which are used in art, music, biology and
architecture, are also used in the financial markets to identify strong
support/resistance levels.

Fibonacci Ratio's Prepared By Sunil Mangwani

The Fibonacci sequence
• The sequence, shown below, simply says that the third number is effectively the
sum of previous two numbers -
1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, and so on.

• In this series, the real value lie's in the fact, that the ratio of any number to the
next higher number is approximately 0.618, and the lower number is 1.618.

• The key Fibonacci ratio of 61.8% - also referred to as "the golden ratio" or "the
golden mean" - is found by dividing one number in the series by the number that
follows it. For example: 8/13 = 0.6153, and 55/89 = 0.6179.

• The 38.2% ratio is found by dividing one number in the series by the number
that is found two places to the right. For example: 55/144 = 0.3819.

• The 23.6% ratio is found by dividing one number in the series by the number
that is three places to the right. For example: 8/34 = 0.2352.

Fibonacci Ratio's Prepared By Sunil Mangwani

Using the Fibonacci ratios
• These ratios developed by Fibonacci actually go back thousands of years to the
time of the Egyptians and the Greeks. In addition to mathematics, they also used
this Golden Mean in architecture and music.

• But the truth is most traders seldom use it properly. And ironically, even though it
is one of the most effective tools of technical analysis, it is also the most
misunderstood.

• It can accurately anticipate when the market makes a major turn & identify key
turning points for tops and bottoms... only if you know how to read it correctly.

• If you can learn to use them correctly, you can increase the probability of
profitable trades & minimize potential losses.

• Surprisingly, the Fibonacci ratios are easy to use, when you know how. But at the
same time, it's also easy to misuse it.

• That's why a trader must learn how to use it correctly.

Fibonacci Ratio's Prepared By Sunil Mangwani

The Fibonacci ratios in trading

• Since forex is a highly trending market, where prices are visibly changing in an
oscillatory pattern, it follows the Fibonacci ratios quite precisely. These Fibonacci
levels act as strong indicators of resistance and support levels….which helps to
improve the accuracy of the entry and exit point for every trade.

• One of the immense advantages of trading with Fibonacci numbers is the fact
that you can define not only stop losses to exit a market, but set profit objectives
as well.

• The different Fibonacci ratios are the cornerstone of price structure and go hand-
in-glove with effective chart patterns like Elliot waves, Harmonic patterns,
Divergences etc.

Fibonacci Ratio's Prepared By Sunil Mangwani

The different Fibonacci ratios
• The Fibonacci studies can be separated into four main groups:
• Retracements.
• Fans.
• Arcs.
• Time zones.
• A common mis-interpretation of the Fibonacci numbers is that traders tend to use
the same Fibonacci ratio for all kinds of situations.
• But every trading situation demands an appropriate Fibonacci ratio…with
different values.
• Just like the different tools in a carpenter’s tool box, each ratio should be used in
a particular situation.
• Using these ratios in a proper way gives us a tremendous advantage over the
crowd.

Fibonacci Ratio's Prepared By Sunil Mangwani

The Fibonacci ratios and the financial
markets

• For some reason, these ratios seem to play an important role in the financial
markets, just as they do in nature, and can be used to determine critical points
that cause price to reverse.

• Price has an uncanny way of respecting Fibonacci ratio’s, often quite precisely.
Hence one can use the Fib ratios to ascertain the correct technical levels.

• Price action is never random, and every wave leaves behind the clues
for the next move. We can thus, use the previous price action to
determine the anticipated price movement.

Fibonacci Ratio's Prepared By Sunil Mangwani

The Fibonacci Retracement.
• Retracements occur when a given market is rapidly heading in a certain direction.
The market retracts as traders tend to take some profits. This retraction represents
a good time to re-enter the market, since the levels will be very appealing before
the market starts growing again.

• The Fibonacci retracement is calculated by taking two extreme points (usually a

swing high and swing low) on the price movement and dividing the vertical
distance by the key Fibonacci ratios.

• Once these levels are identified, horizontal lines are drawn and used to identify
possible support and resistance levels.

• The direction of the prior trend is likely to continue once the price has retraced to
any of the ratios.

• The basic use of Fibonacci retracement is to find potential levels of support or

resistance “behind” the market. If the market is moving up and making new highs,
Fib retraces will draw levels BELOW the current price.

Fibonacci Ratio's Prepared By Sunil Mangwani

The Golden Mean levels.

• Of all the ratios, the 0.618 and 0.786 levels hold a lot of importance.

• The 0.786 is the square root of the “golden number” 0.618, and hence acts as a
very strong level of resistance / support.

• These are the levels from where price has a very high probability of retracement.

• The 0.618 and 0.786 are thus known as the “reversal” fib levels.

Fibonacci Ratio's Prepared By Sunil Mangwani

Ideal situation to use the Fib
retracement.

• 1.) For price in an existing trend - when we are looking for a pullback to rejoin
the existing trend.

• In case of an uptrend, we plot the Fib retracement ratios on the previous existing
uptrend.

• If the pullback is held within the Fib retracement - and specifically as mentioned
before - if price does not break the 0.786 level or finds support at that level, then
the indication is that price should resume the up trend again.

Fibonacci Ratio's Prepared By Sunil Mangwani

Ideal situation to use the
Fib retracement.

Fibonacci Ratio's Prepared By Sunil Mangwani

Ideal situation to use the Fib
retracement.

• 2.) For setting trading parameters –

• The Fibonacci levels can also be used for setting trade parameters.

• Hence if one has to take a long trade after the pullback, the break of the 23.6
level should be considered to be the entry, with the stop below the 78.6 level.

• One can infer that if price has broken the 23.6 level, then it has gathered
sufficient momentum to resume the move in the direction of the existing trend.

• Hence, the probability of price going down to the 78.6 level is quite
remote…….which becomes the correct technical level to place the stop.

Fibonacci Ratio's Prepared By Sunil Mangwani

Ideal situation to use the
Fib retracement.

Fibonacci Ratio's Prepared By Sunil Mangwani

The Fibonacci Projection.
• The Fibonacci projections are used to determine the expected price targets, once
it has crossed the Fibonacci retracement levels.

• If we are anticipating price to resume the uptrend, we can use the last prominent
pullback to determine the expected targets.

• The calculation of the Fibonacci projection is based on this principle, and we can
project the price action forward, using the last prominent moves.

• The Fibonacci projection is calculated by taking two extreme points (usually a

swing high and swing low) on the price movement and adding the key Fibonacci
ratios of 1.272%, 1.618%, 2.000% & 261.8%.

• Once price has crossed the levels of the swing high or swing low, the above
mentioned projection levels identify possible support and resistance levels.

• Of all the ratios, the 1.272% & 1.618% levels hold a lot of importance, since they
usually act as very strong levels of resistance / support.

Fibonacci Ratio's Prepared By Sunil Mangwani

Ideal situation to use the Fib
projection.

• 1.) For estimating the price targets after the pullback is completed.

• We project the price action forward, estimating that it will reach the fib levels.

Fibonacci Ratio's Prepared By Sunil Mangwani

Ideal situation to use the
Fib projection.

Fibonacci Ratio's Prepared By Sunil Mangwani

Elliot waves.
• Go hand in glove with Fib retracements & projections. The waves adhere to these
ratios quite accurately.

• The Elliot waves always form within the parameters of the Fibonacci
retracements and Fibonacci projections.

• The Elliot wave parameters -

• Wave 2 is a sharp correction, which should retrace wave 1 by about 61.8% or

78.6% by price distance.

• Wave 3 would often be 200.0% to 261.8% projection of wave 1 – wave 2 by

price distance.

• Wave 4 will very often retrace about 38.2% to 61.8% of wave 3 by price
distance.

• Wave 5 would often be 127.2% to 161.8% projection of wave 3 by price

distance.

Fibonacci Ratio's Prepared By Sunil Mangwani

Elliot waves.

Fibonacci Ratio's Prepared By Sunil Mangwani

The Fibonacci Fans.

• The Fibonacci fans are a charting technique consisting of diagonal lines that use
Fibonacci ratios to help identify key levels of support and resistance.

• Fibonacci fans are created by first drawing a trend line through two points
(usually the high and low), and then by dividing the vertical distance between the
two points by the key Fibonacci ratios.

• The result of these divisions each represents a point within the vertical distance.
The 'fan' lines are then created by drawing a line from the leftmost point to each
of the three representing a Fibonacci ratio.

Fibonacci Ratio's Prepared By Sunil Mangwani

The Fibonacci Fans.

Fibonacci Ratio's Prepared By Sunil Mangwani

Thumb rules for Fibonacci Fans.

• Fib Fans give strong indications of direction. They act as effective filters for a
trend. It is considered, that these lines will serve as levels of support/resistance
for a developing pullback or a new trend.

• The fans that we use have 5 levels marked by fib levels – 38.2%; 50.0%; 61.8%;
76.4% & 88.6%. The fans thus create 4 channels between the 5 fib fan levels.

• Of all the ratios, the 88.6 level holds a lot of importance. This is the level, from
where price has a very high probability of retracement. We can thus call the 88.6
fan fib level as “The Barrier Level on Fib Fans.” It is a level of high probability
for trend change. Once price closes beyond 88.6, there is a high probability the
trend has reversed. Fib Levels are Pause Points for Price.

Fibonacci Ratio's Prepared By Sunil Mangwani

Thumb rules for Fibonacci Fans.

• If price breaks a fan level, it has a very high probability of going to the next fan
level. For example, if price has closed above the 76.4 fan line, the probability of it
going to the 88.6 fan line is very high. And if fan line holds, then we could have a
reversal in place.

• Once you have plotted fib fans, wait for price to enter the 1st channel. A
retracement gets confirmed only if price enters the first fan channel. However, at
each fan level, one must observe price action to determine if a reversal will occur.

• For a valid entry into a fan level, one must have a candle close within the fan
channel. (Candle close of the same time frame that one is referring to)

• A high probability of reversal is considered when we have a strong candlestick

pattern (like a Doji) forming on a fib fan level.

Fibonacci Ratio's Prepared By Sunil Mangwani

Ideal situations to use Fibonacci Fans.

• 1.) For price in an existing trend - when price forms a pullback/retracement.

• We can use the fans to determine the extent of the pullback, and whether price
should continue with the existing uptrend or form a reversal.

• In case of an uptrend, we plot the Fib fans on the existing up trend from the
swing low to the swing high (from where price started the pullback down)

• If the pullback is held within the Fib fans - and specifically as mentioned before -
if price does not break the 88.6 fan level or finds support at that level, then the
indication is that price should resume the up move again.

Fibonacci Ratio's Prepared By Sunil Mangwani

Ideal situations to use Fibonacci Fans.

Fibonacci Ratio's 23
Prepared By Sunil Mangwani
Trading parameters for Fibonacci
Fans.
• As a thumb rule, the confirmation for the resumption of the trend would be when
price breaks into the 3rd channel (above 61.8 level)

• Hence the break of the 61.8 level should be considered to be the entry, with the
stop below the 88.6 level.

• The assumption is that if price has broken the 61.8 level, then it has gathered
sufficient momentum to resume the move in the direction of the existing trend.

• Hence, the probability of price moving back down to the 88.6 level is quite
remote…….which becomes the correct technical level to place the stop.

Fibonacci Ratio's Prepared By Sunil Mangwani

Trading parameters for Fibonacci
Fans.

Fibonacci Ratio's Prepared By Sunil Mangwani

Ideal situations to use Fibonacci Fans.

• 2.) To determine the future levels of support/resistance (in case of an uptrend)

• Once the fans have been plotted from a swing low to a swing high in an existing
uptrend, one should leave the lines since they subsequently form the levels for
resistance, which would indicate a change of trend to the downside & confirm
certain support levels.

Fibonacci Ratio's Prepared By Sunil Mangwani

Ideal situations to use Fibonacci Fans.

Fibonacci Ratio's Prepared By Sunil Mangwani

The Fibonacci Expansion.

• The Fibonacci expansion is a great tool for establishing profit targets.

• It offers a distinct advantage over the other usual fib ratios, since it is used to
calculate the price objectives in an existing trend.

• Rather than drawing levels “behind” the market, the fib expansions draw them in
“front” of the market.

• In other words, if the market is moving up and making new highs, the standard
fib retracements will draw levels BELOW the current price, but the fib expansions
will draw levels ABOVE the current price.

• The fib expansions determine where prices could potentially move to. The
advantage is that these levels are drawn “front” of the market.

Fibonacci Ratio's Prepared By Sunil Mangwani

The Fibonacci Expansion.

• To draw Fibonacci Expansion targets, we require three swing points

• We measure the distance from Point A to Point B. However, we can’t project

price targets until Point C has been established. Only when Point C has been
formed do we have the necessary three swing points.

• In short, we identify a trend that has started and pulled back, forming Points A
and B, and wait for Point C to form.

• Once Point C has formed, we plot the Fibonacci Expansion Tool on Point A, Point
B, and Point C.

Fibonacci Ratio's Prepared By Sunil Mangwani

The Fibonacci Expansion.

Fibonacci Ratio's Prepared By Sunil Mangwani

Thumb rules for Fibonacci Expansion.

• The FE’s that we use have 5 levels marked by fib levels – 50.0%; 78.6%;
100.0%; 127.2%; 161.8% & 261.8%.

• Of all the ratios, the 50.0 & the 78.6 levels hold a lot of importance. A break of
the FE 50 is an indication of the continuation of trend. And subsequently, the
break of the FE 78.6 becomes the confirmation of the change.

• The FE 78.6 is known as “The Barrier Level” as it is the level of high probability
for trend change. Once price closes beyond FE 78.6, there is a high probability of
the trend continuing. (The requirement is a close of a candle outside this level,
and not just a penetration of the level)

• It’s especially significant to draw the FE levels at turning points in the market,
which is when the market is putting in its first Higher Low or first Lower High.

Fibonacci Ratio's Prepared By Sunil Mangwani

Thumb rules for Fibonacci Expansion.

• Fib Expansions are useful in identifying potential price levels where you might
want to take partial positions off the table to lock in some trading profits. They
can be used very effectively to calculate the reward to expect, for the risk you
are taking.

• Once you have plotted fib expansions, wait for price to break the FE 50. The
continuation is confirmed only if price breaks the FE 78.6. However, at each FE
level, one must observe price action to determine if price will continue further.

• If price breaks a FE level, it has a very high probability of going to the next FE
level. For example, if price has closed above the FE 78.6, the probability of it
going to the FE 127.2 is very high.

• For a valid entry into a FE level, one must have a candle close within the FE level.
(Candle close of the same time frame that one is referring to)

Fibonacci Ratio's Prepared By Sunil Mangwani

Ideal situation for Fibonacci
Expansion.

• For estimating the price objectives of a 1-2-3 pattern.

Fibonacci Ratio's Prepared By Sunil Mangwani

Ideal situation for Fibonacci
Expansion.

Fibonacci Ratio's Prepared By Sunil Mangwani

Common thumb rules for all
Fibonacci ratios.
• If price breaks one fib level, it has a very high probability of going to the next fib
level.
• For effective use of the fibs, plot the fibs on previous cycle to determine the
extent of the current cycle.
• For a valid entry into a fib level, one must have a candle close above/below the
fib level. (Candle close of the same time frame that one is referring to)
• A high probability of reversal is considered when we have a strong candlestick
pattern / chart pattern (like a Doji or a divergence) forming on a fib level.
• A break of the 78.6 fib level indicates a high probability of price reaching the
127.2 level.
• A break of the 127.2 fib level indicates a high probability of price reaching the
161.8 level.
• There is usually a considerable amount of consolidation, both in price & time
between the 127.2 & 161.8 fib levels.
• A break of the 161.8 fib level indicates a high probability of price of price
reaching the 261.8 level.

Fibonacci Ratio's Prepared By Sunil Mangwani