Nature's numbering scheme is the Fibonacci numbers. They occur anywhere in nature, from the arrangement of the leaves in plants to the pattern of a flower's florets, a pinecone's bracts, or a pineapple's scales. Therefore the Fibonacci numbers apply to any living thing's growth.
Explanation
The series of Fibonacci consists of 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89. In which each number is equal to the last two numbers which have been added together. A variety of interrelationships exist between these numbers. Any given number is approximately 1.618 times the previous number, and approximately 0.618 times the following number is any given number.
The ratio of any number in the series to its next highest number tends toward the 'golden ratio' of around 0.618, as follows:
1/2 = 0.500
2/3 = 0.667
3/5 = 0.600
5/8 = 0.625
8/13 = 0.615
13/21 = 0.619
21/34 = 0.618
34/55 = 0.618
55/89 = 0.618
Etc.
Any number has a ratio of approximately 1.618 to its next lower number or the opposite of 0.618. 21/13 = 1.615 and 55/34 = 1.61777, for instance.
2.618 or its inverse 0.382 are the ratios of alternative numbers. 13/34 = 0.382 and 34/13 = 2.615, for instance.
Using Fibonacci ratios
The technical analysis techniques studied so far have primarily been concerned with determining the market's trajectory and consolidation potential. During patterns and corrective formations, Fibonacci ratios assist in evaluating price targets. Market participants need data as immediate feedback about the path of a market. Potential target levels that prices can move towards are secondary and almost as significant. For good trading and investment decisions, the questions of where the market can trend or retrace are important.
Retracements: The 0.618, 0.382, and 0.500 ratios are generally referred to as Fibonacci retracement stages. When the market trends strongly and then fall back into a downturn is know as a retracement. Before resuming the previous trend, these corrections could take the form of a rectangle, flag, and triangle. The Fibonacci figures indicate that before continuing its movement, the market may retrace 38.2 percent of its move - or maybe 50 percent, or 61.8 percent of its move.
Projections: In a trending market, Fibonacci ratios are also applied to assess goals and possible resistance or support levels. The idea is that the next big direction change should be a ratio of the previous trending process after a correction has occurred within a pattern. Ratios from 0.382 to 2.618 and beyond are used to assess projection amounts.
Source: Fibonacci Retracement Levels
Source: Fibonacci Extensions Definition and Levels
Applying Fibonacci ratios
The significance of predicting future help and levels of resistance is self-evident. Unfortunately, using these methods correctly relies on adhering to various rules and guidelines, and a reasonable amount of expertise and experience is required for successful study.
Fibonacci ratios are extensively applied and form the basis of the study of the Elliott wave.
These ratios are accompanied by the creation of large formations and consolidations. To evaluate the size, predicted breakouts, and degree of maturity, triangles, rectangles, flags, and other complex patterns can be analyzed.
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