Introduction

The Fibonacci number sequence was discovered by Italian mathematician Leonardo of Pisa or Leonardo Fibonacci.

• The numbers are formed by taking the current number and adding it to the previous number in the sequence.

1+1=2; 2+1=3; 3+2=5; 5+3=8; 8+5=13, etc...

• Here are the first 20 numbers or so in the sequence:

0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987, 1597, 2584, 4181, 6765, 10946.

• The Fibonacci numbers 13 and 21 are common default values for periods in moving averages and other technical indicators.

The Fibonacci numbers have a common pattern, after you get past the initial couple of numbers:

• Each number in the sequence is 1.618 times the preceding number.
• And, each number is 0.618 times the following number in the sequence.

This ratio is known as known as "the golden ratio" and it appears often in geometry, in acrhcitecutre, art, and in nature.

Fibonacci Numbers Use in Technical Analysis 

Technical traders have taken on this ratio, 61.8%, when plotting retracement levels. Fibonacci retracement levels are used to measure the magnitude of a trend's "pullback" or "correction." This happens when a trend runs out of momentum and reverses. The trader uses fibonacci levels to try and identify levels of support and resistance in comparison to the original trend.

In addition to 61.8%, traders use the obvious level of 50%. When a trend pares half its gains, it will be an important psychological level for the market. We'll calculate how to get the other levels in the next page and give some more background about the use of Fibonacci levels.

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