From his studies he discovered a particular number series that was applicable to the natural proportions of matter it in both nature and the universe.

The Fibonacci sequence is a numerical sequence beginning with 1. Each subsequent number in the series is created by adding together the two previous numbers. Therefore the second number would be 1+1, the third number 1+2, the forth number 2+3 and so on. From this sequence (1,2,3,5,8,13,21…) he identified what is called the Golden ratio. If you divide any number in the series after 3 by the next highest number the resultant answer is 62.5. The higher up the number sequence you carry out the calculations the closer the ratio comes to 61.8%, which is termed the ‘Golden Number.’

The ratios applied in Forex trading make use of this Golden Number and also set out additional incremental stages of this ratio. These are 23.2%, 38.2%, 50.0 % and 61.8%. The lowest level of the move is referred to as 0.0% and the limit of the move is referred to as 100.0%

These levels are used in Forex trading to project both price contractions and price extensions within the market.

1. Fibonacci retracement levels

Retracement levels are defined areas, based on the Fibonacci ratio, which aim to identify where the market is likely to pull back to after a preceding move. In a market trending up these are referred to as a Fibonacci support level. When a market is heading down these are known as a Fibonacci resistance level. These provide the opportunity for traders to set up positions in the market after a retracement has competed.

2. Fibonacci price extension levels

While Fibonacci retracements can be used to profit following a market move, Fibonacci price extensions are used to predict how far a move is likely to travel. Again the Fibonacci levels are applied but in this instance they are used as price targets for the trader to take profits.

Fibonacci levels tend to work due to the expectation of many traders watching and trading at these levels. As result it can be argued that to some degree these levels become a self-fulfilling prophecy.

You can calculate Fibonacci levels by entering the high and the low of a move into a Fibonacci Calculator and apply them to your own charts.

Fibonacci levels make an important addition to the traders’ technical toolbox. It is certainly worth thinking about Fibonacci levels the next time you are analysing a trading opportunity. However as with all technical methods it is best to seek confirmation by the use of additional indicators rather than simply relying on just one method technical alone.