Fibonacci theory

In the mid of nineteenth century a person with the name of Leonardo dapizaFibonacci, created a relation in the retracement in the price movements. He calculated this price levels according in percentage and mathematical numbers. His theory begins by adding numbers beginning by 1+1. In this calculation, the total of every equation is plus by the second number of the previous adding…like this:

1+1=2   1+2=3  2+3=5   3+5=8   5+8=13   8+13=21   13+21=34   21+34=55..........

By dividing the result to each other, we reach to the Fibonacci percentages. For example 34 divided on 55 results 0.618.

Fibonacci Retracement

Fibonacci Retracement are built as follows: first, a trend line is built between two extreme points, for example, from the trough to the opposing peak. Then, nine horizontal lines intersecting the trend line at Fibonacci levels of 0.0, 23.6, 38.2, 50, 61.8, 100, 161.8, 261.8, and 423.6 per cent are drawn. After a significant rise or decline, prices often return to their previous levels correcting an essential part (and sometimes completely) of their initial movement. Prices often face support/resistance at the level of Fibonacci Retracements or near them in the course of such a reciprocal movement.


Fibonacci Arcs

Fibonacci Arcs are built as follows: first, the trend line is drawn between two extreme points, for example, from the trough to the opposing peak. Then three arcs are built having their centers in the second extreme point and intersecting the trend line at Fibonacci levels of 38.2, 50, and 61.8 per cent.

Fibonacci arcs are considered to be potential support and resistance levels. Fibonacci Arcs and Fibonacci Fans are usually plotted together on the chart, and support and resistance levels are determined by the points of intersection of these lines.


It should be noted that the points of intersection of Arcs and the price curve can change depending on the chart scale since an arc is a part of a circumference, and its form is always the same.



Fibonacci Fan

Fibonacci Fan as a line instrument is built as follows: a trend line — for example from a trough to the opposing peak is drawn between two extreme points. Then, an "invisible" vertical line is automatically drawn through the second extreme point. After that, three trend lines intersecting this invisible vertical line at Fibonacci levels of 38.2, 50, and 61.8 percent are drawn from the first extreme point.

These lines are considered to represent support and resistance levels. For getting a more precise forecast, it is recommended to use other Fibonacci instruments along with the Fan.



Fibonacci Time Zones

Fibonacci Time Zones is a sequence of vertical lines having Fibonacci intervals of 1, 2, 3, 5, 8, 13, 21, 34, etc. Significant price changes are considered to be expected near these lines.

To build this instrument, it is necessary to specify two points to determine the length of a unit interval. All other lines are built on base of this unit interval according to Fibonacci Numbers.


Fibonacci Expansion

Fibonacci Expansion is largely similar to Fibonacci Retracement and intended for determining of the end of the third wave. Unlike Fibonacci Retracement, this instrument is built not on the only one trend line, but on two waves.

First, the line of the first wave is drawn, its height will be considered as a unit interval later on. The end of the second wave serves as a reference point for building an invisible vertical line. The corresponding lines are drawn from the reference point on the interval equal to 61.8, 100%, and 161.8 per cent of the unit interval. The third wave is considered to finish near these levels.


Category: Technical Analysis Topics