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Fibonacci Numbers

Fibonacci numbers describe the patterns of price movements in financial markets. Specifically: 1) Price movements tend to retrace a certain percentage of the previous movement before reversing direction, following Fibonacci ratios of 38.2%, 50%, and 61.8%. 2) Identifying high and low price points allows plotting of Fibonacci retracement levels to determine significant support and resistance levels. 3) Observing historical price behavior at Fibonacci levels improves the ability to forecast future price movement and successful entry and exit points.

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67 views

Fibonacci Numbers

Fibonacci numbers describe the patterns of price movements in financial markets. Specifically: 1) Price movements tend to retrace a certain percentage of the previous movement before reversing direction, following Fibonacci ratios of 38.2%, 50%, and 61.8%. 2) Identifying high and low price points allows plotting of Fibonacci retracement levels to determine significant support and resistance levels. 3) Observing historical price behavior at Fibonacci levels improves the ability to forecast future price movement and successful entry and exit points.

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tabbytab
Copyright
© Attribution Non-Commercial (BY-NC)
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Download as DOC, PDF, TXT or read online on Scribd
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Fibonacci numbers

Many people ask me if Fibonacci retracements and extensions really work when it comes to trading, and to
the that I have the following answers.
First off all I would recomend that you go and read my article on Fibonacci sequence Explained. Then
come back here and we'll discuss this further.
I think everyone knows that price moves in a retracement type fashion in any direction accept when it's
trading sidways.If price is going up, it tends to do so in a series of what impulses and corrections.
These impulses and corrections look like this:

There are many different scenarios this


perticular pattern could be apart of, but the potential for the application of Fibonacci retracements and
extensions lies in not only this 5 wave move up, but also and especially in the overall correction of this
move.
You see although this is 3 impulse waves, and 2 corrective waves, on the larger scale its one impulse
wave. Here's what I mean:

5 Rules to Perfect Fibonacci Chart Plotting


Fibonacci retracements represent an excellent tool for investors, identifying reversal points on a historical
price chart. Anyone can see that on any historical price chart, trading prices will inherently pull back or
retrace a percentage of the previous movement before reversing again and then proceeding in the
direction of the overall long-term trend.
Historical observations demonstrate that these retracement percentages seem to follow a Fibonacci ratio
pattern. By carefully plotting these retracement possibilities on a historical price chart, a trader improves
his or her probability towards successful investing. Certain rules are recommended to improve the
likelihood of identifying successful entry and exit points.
Rule 1: Identify the High and Low
In order to use Fibonacci retracements, it is important to identify relative high and low prices on a
historical chart. The longer the term that is utilized, the more likely the Fibonacci retracement lines plotted
will identify significant levels demonstrated support and resistance.
Rule 2: Plot the Fibonacci Retracement Levels
Once a high and low for a time period has been chosen, it will be possible to draw the Fibonacci
retracement percentage levels onto the chart. The low point would represent 0%, and the high point
represents 100%.
Between these two extremes, one can plot the most significant Fibonacci percentage plot lines of 38.2%,
50%, and 61.8%. It is also beneficial to plot these percentages below and above the high and low. In
other words, plot lines that would be 138.2%, 150%, and 200% on the up side above the high, and
-30.2%, -50%, and -61.8% on the down side below the low. It should be noted that software exists that
will allow you to automatically plot these Fibonacci levels.
Rule 3: Observe Historical Behavior
Once the plot lines have been placed on the chart, it is important to observe at which Fibonacci levels in
the historical period under consideration has demonstrated support and resistance. These areas will be
objectively seen to show that when approached, retracement clearly resulted.
Rule 4: Forecast Future Movement
The appropriate Fibonacci retracements will vary from investment market to investment market and be a
function also of the trading character at any particular time. Consequently, successful use of Fibonacci
techniques will be highly dependent on the accurate interpretation of previous price movement activity
within the range identified. When the proper Fibonacci retracements have been observed, entry and exit
points can be forecasted for position-taking based upon the clearly demonstrated historical record.
Rule 5: Always Have Confirmation
Through study and observation, many successful traders have mastered the techniques necessary
for the use of Fibonacci retracement ratios. As anyone can see, however, the support and
resistance represented by these levels do not automatically appear at all times. In other words,
after the 38.2% retracement, the price may continue in that direction and not stop or reverse itself
until perhaps it reaches 61.8%.
What is clear, however, at a certain Fibonacci point, a retracement will occur. As a result of this,
the use of Fibonacci techniques is most successful when used in conjunction with other technical
analysis tools that confirm what has been identified.

http://www.oecd.org/dataoecd/57/61/46890029.pdf
http://www.bizresearchpapers.com/Shah.pdf

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