FIBONACCI

RETRACEMENTS

INTRODUCTION
You may remember hearing something about the name Fibonacci
in 2006, when the movie The Da Vinci Code appeared in
theatres. When Jacques Sauniere was found murdered at the
Louvre museum in Paris, the strange position that his body was
placed in mimicked the famous painting of the Vitruvian man by
Leonardo da Vinci.
This
painting
illustrates
how
Fibonacci ratios appear in the
human form. The film also piqued
the
curiosity
when
some
characters started talking about
Fibonacci numbers as a part of one
of the clues.

The Vitruvian Man by Leonardo Da Vinci

THE FIBONACCI NUMBERS

The Fibonacci number series and the properties of this series were made famous by
Italian mathematician Leonardo de Pisa. The Fibonacci number series starts with
0 and 1 and goes out to infinity, with the next number in the series being derived
by adding the prior two. (e.g. 0 + 1 = 1, 1 + 1 = 2, 2 + 3 = 5, and so on).
0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987 up to infinity.

What is most fascinating about this number

series is that there is a constant found within the
series as it progresses towards infinity. In the
relationship between the numbers in the series,
you will find that the ratio between consecutive
numbers after 13 is 1.618, which is called the
golden ratio, golden mean, or the Divine
Proportion.
Leonardo de Pisa, who
was known as Fibonacci

FIBONACCI PRICE
RETRACEMENTS
Fibonacci price retracements are run from prior low to high swing using the ratios .382 (1-.618), .5 (1/2), .618 (the golden ratio), .786 (square
root of .618 the golden ratio).
236 is also used in some cases to identify possible support levels as the market pull backs from a high. Retracements are also run from prior
high to low swings using these ratios, looking for possible resistance as the market bounces from the low.
Though most basic technical analysis packages will run the ratios for you but to understand the math behind it, multiply the length of the swing
(from low to high or high to low) by the retracement ratios and then subtract the results from high if you are running low to high swings and add
to low if you are running high to low swings.

1.618, the approximate

value of the Golden Ratio.

EXAMPLES OF FIBONACCI
PRICE RETRACEMENTS
Now let's go through certain examples using the Fibonacci
retracements, in the diagram below we ran the Fibonacci
retracement from 04/10/06 low to 1/12/06 high, which was an 86.9
point swing looking for potential support. Note that this contract
found support only around the .618 retracement of this prior swing.
None of the other ratios provide meaningful support.

The next retracement is daily chart of Microsoft. Here we retraced

from 15/11/04 highs to 29/03/05 lows. Notice that resistance was
mostly around .618 retracement levels.

CORRECT
RETRACEMENT
One of the ways to create Fibonacci price cluster is by running retracements on multiple
swings on the chart, the important point is to select the right swings which can be
demonstrated with the help of figures below-

INCORRECT WAY

CORRECT WAY

CONCLUSION
Thus we can see that Fibonacci retracements can provide
important resistance and support levels but one very important
thing to consider over here is unlike other studies in technical
analysis support does not become resistance or vise a versa. The
more accurate way is to find new support and resistance levels.

Thank You!
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