Fibonacci retracements help you reveal bear and bull corrections within a trend. These trends are opposing movements to the main direction of the asset’s price course: these phenomena are called retracements.
Origin of Fibonacci retracements: the mathematician Leonardo Fibonacci, who created a numeric series by adding a series of numbers in the following manner, established this method:
The series looks like this: 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377…It is calculated like this: (1+1=2 ; 2+1 = 3 ; 3+2=5 ;….)
The golden number: The series of numbers presented earlier display some particularities. What we notice is the fact that each number is equal to 1.618 times more than the preceding number and 0.618 times less than the following number. Thus, 1.618 is the golden number and 0.618 is the inverse called the golden ratio.
How to draw Fibonacci retracements on a graph: On a graph, identify the highest and lowest points of the asset price. Draw horizontal lines at different levels: 23.6%, 38.2%, 50.0%, 61.8% and 100%.
The principle of Fibonacci retracements is that Bearish and bullish trends are never linear, but:
– A bearish trend will have correction periods
– A bullish trend will have rebound periods
It is these corrections and rebounds that are known as retracements. To derive the retracement zones, the calculation is simple. You need to know the asset price variation.
How to calculate the asset’s amplitude: Take the price activity of very popular raw material: silver. In the image below, the asset price is going through a bullish trend of 30.95 to 30.71. To find the retracement zones, use Fibonacci’s golden numbers:
Retracements allow you to determine the resistance zones in the case of a bearish trend retracement (in the image above) and support zones in the case of a bullish trend retracement.