Tired of missing yet another webinar? Introducing XM Live Education.


Watch Here (https://www.xm.com/live-player/xmlive)  LIVE (https://www.xm.com/live-player/xmlive)

FIBONACCI
XM (https://www.XM.com)  Forex Education (https://www.XM.com/education)  Forex Education – Chapter 2 (h

A Brief Overview
Back in the early 1200’s, an Italian mathematician by the name of
Leonardo of Pisa, also commonly known as simply Fibonacci,
became famous for spreading the Hindu-Arabic numerical system
throughout Europe and the rest of the world. He did this by
publishing a book in 1202 entitled Liber Abaci, in which he
explained a certain number sequence, called the Fibonacci
sequence.

This Fibonacci number sequence begins with 1, 1, 2, 3, 5, 8, 13,

21, 34, 55, 89, 144, 233, 377, and so on until infinity.

Fibonacci explained how this series of numbers created ratios,

which describe the natural proportions of many things in the
universe. Today we use these Fibonacci numbers in the analysis of
computer algorithms, biological systems and very often in
analyzing financial markets. They form one of the main pillars of
technical analysis.

Ratios
After the first few numbers in the sequence, the ratio between one
number and the succeeding numbers will be 0.618. For example,
34 divided by 55 equals 0.618. Or 144 divided by 233 equals
0.618…and so on. Also, if we measure the ratio between alternate
numbers we will get 0.382.

For example, 34 divided by 89 equals 0.382. And 144 divided by

377 equals 0.382.

What you need to know is that there are different ratios we can
calculate from the Fibonacci number sequence and they care
called the golden ratio. And the reason these ratios are important
for us in technical analysis is that they give us the important
Fibonacci retracement levels and extension levels.

Fibonacci Retracement Levels

0.236, 0.382, 0.618

These Fibonacci retracement levels can also be seen as a

percentage instead of a ratio.Therefore, we have the most
common retracements levels at 23.6 %, 38.2% and 61.8%. See the
chart below.

Extension Levels
1.618, 2.618, 4.236

The Fibonacci extension levels would be 161.8%, 261.8% and

423.6%.
The Golden Ratio
The ratio we derived from the Fibonacci sequence, which is 1.618
or its inverse, 0.618, is known as the golden ratio. It is also
sometimes called Phi, which is the Greek letter Φ.

Almost everything in nature has dimensional properties that

adhere to phi; the ratio of 1.618. This ratio can be seen in
relationships between different components throughout nature
and seems to have a fundamental function for the building blocks
of nature.

For example, let’s look at sunflowers which form a golden spiral. If

we apply the Golden Ratio to a circle we can see how it is that this
plant exhibits Fibonacci qualities.

Sunflowers have opposing spirals of seeds, which amazingly have

a ratio of 1.618 between the diameters of each rotation!

This is because the individual florets of the sunflower in the center

grow in two spirals extending out from the centre in opposite
directions. So if the first spiral has 21 arms, while the other has 34,
these are Fibonacci numbers, and have the golden ratio.

The golden spiral is also evident in shells.

We can also find the golden ratio in the human body. Obviously,
everyone is different, but in a perfect human body as defined by
scientists this ratio is present.

The ratio between the forearm and the hand gives us the golden
ratio!

On the human face we can see various golden ratios, as well. For
example:

 Length of face / width of face

 Length of mouth / width of nose

 Width of nose / distance between nostrils

 Distance between pupils of eyes / distance between eyebrows

Fibonacci Retracements
Fibonacci retracements are a common tool used in trading. They
show us by how much a market movement has the potential to
retrace or pull back. As we saw previously, the market does not
move in a straight line but in a zigzag pattern, creating
consecutive peaks and troughs. Then from these tops and
bottoms we can derive our support and resistance levels.

Fibonacci retracement levels can help us find these potential

support and resistance levels. From these, we can identify
potential buy and sell entry points.
The Fibonacci retracement is created by taking two extreme
points, which are usually the highest peak and the lowest trough
on the chart. We call them the All Time High (ATH) and the All
Time Low (ATL). Most trading platforms usually automatically
calculate the retracement levels.

The resulting numbers come from dividing the vertical distance

between the ATH and ATL by the key Fibonacci ratios of 23.6%,
38.2% and 61.8%. Once these levels are found, horizontal lines are
drawn and used to identify possible support and resistance levels.

Finding Retracement Levels in

an Uptrend
Below is an example of GBPUSD in an uptrend on a daily chart.

By using the Fibonacci tool on the chart, from the All Time Low
(ATL) to the All Time High (ATH) we obtain the retracement levels.
As can be seen, the main Fibonacci retracement levels are as
follows:
 FIBONACCI RETRACEMENT PRICE LEVEL

23.6% 1.5482

38.2% 1.5288

61.8% 1.4975

Based on these retracement levels, there is potential in the days

ahead for GBPUSD to retrace (pullback) from the recent peak to
dip to one of these Fibonacci levels. We expect prices to find
support at one of these levels and it will give us an opportunity to
enter the market and place a buy order.

After observing our GBPUSD daily chart for a few days, we can see
that prices did in fact retrace from the all time high.

We can see that the price dipped to the 38.2% Fibonacci

retracement level and then held at the 23.6% level. Strong support
was found at this level and prices were unable to close below it,
resulting in a bounce. The market resumed the prior uptrend. Here
we had a good opportunity to enter the market at the 23.6% level
and enter a buy position.

Finding Retracement Levels in

a Downtrend
Let us look at a chart for the GBPUSD in a daily time frame in a
downtrend.
By using the Fibonacci tool on the chart, from the All Time High to
the All Time Low (ATL) we obtain the retracement levels. As can be
seen, the main Fibonacci retracement levels are as follows:

FIBONACCI RETRACEMENT PRICE LEVEL

23.6% 1.9761

38.2% 2.0028

61.8% 2.0461

Based on these retracement levels, there is potential for GBPUSD

to retrace from the recent trough (ATL) to bounce to one of these
Fibonacci levels. We expect prices to find resistance at one of
these levels and it will give us an opportunity to enter the market
and place a sell order since we expect the downtrend to resume
later. After waiting a few hours, we can observe what happened
next.

What we can is is that after touching the all time low, prices began
to rally all the way up to near the 61.82% Fibonacci retracement
level where they stalled just below that level before resuming the
downtrend. We had a good opportunity to enter the market at the
38.2% level with a sell order.
Summary
We have seen in the two examples above, how Fibonacci
retracement levels can give us good opportunities to enter the
market. We observed that prices retraced at certain Fibonacci
retracement levels, which provided some temporary support or
resistance so that we could place new orders. Of course we have
to be realistic and be careful because Fibonacci levels do not
always hold and what we thought was a retracement could end up
being a trend reversal.

Fibonacci Extensions
Fibonacci extensions are used by many traders to determine
target levels where they wish to take profit. These extensions
consist of all levels drawn beyond the standard Fibonacci levels
(below the100% level), with the most common extension levels
being 161.8%, 261.8% and 423.6%. Fibonacci extensions are a
good way of finding out what price move is expected after a swing
high or swing low is crossed.
Using Fibonacci Extensions in
an Uptrend
When the market is in an uptrend, we look for a swing high
followed by a retracement. Then we use the Fibonacci tool on our
chart from the swing low of the retracement to the swing high.
Notice how this Fibonacci is drawn in a different way from when
we used it in finding retracement levels. The Fibonacci extension
is drawn opposite to the trend.

By doing so, we get the Fibonacci extension levels we want, which

are the 161.8%, 261.8% and 423.6%. We expect that prices will
likely find resistance at these levels if they continue heading
higher from the retracement.

In the chart below we can see that GBPUSD is in an uptrend.

Prices retraced and dipped to the 38.2% Fibonacci retracement
level.

We can see that this 38.2% Fibonacci level was upheld and prices
found strong support at this level before bouncing back up to
resume the uptrend. Prices eventually rose above the previous
swing high (the ATH we used when plotting the Fibonacci
retracement levels).

Here the uptrend held in tact and there was a good opportunity to
take profit. We would have bought on the dip (just above the 38.2%
Fibonacci level). Then we used the Fibonacci extension in order to
calculate the target (profit) levels.
In the chart below we can see that the 161.8% Fibonacci extension
level was reached which was our intended profit target. This would
have been a good place to take some profit.

Important! You do not have to close the whole position at one

level. For example, you can just take profit on half of your long
position at 161.8% and then the rest at a higher target, such as
261.8% if it is reached.

Some Drawbacks
You must be realistic and know that there is no way of knowing
exactly which Fibonacci extension level will provide resistance.
Any of these levels may or may not act as support or resistance.
However, more often than not, there will be some price reaction at
these key Fibonacci extensions.

The only reason price seems to reverse around these key levels is
because so many other traders are also using the same Fibonacci
retracement levels on their charts. So as a result it kind of
becomes a self-fulfilling prophecy because these same traders will
be placing trades around these key levels at the same time, forcing
the price to react as predicted.

It is best to use Fibonacci extensions as a “guide line”.

PREVIOUS (/EDUCATION/CHAPTER-2/MOVING-
AVERAGES)
 NEXT (/EDUCATION/CHAPTER-2/JAPANESE-
CANDLESTICKS)

Privacy Policy (https://www.xm.com/privacy-policy) | Cookie Policy (https://www.xm.com/cookie-policy) | Vulnerability

Policy (https://www.xm.com/vulnerability-disclosure-policy) | Terms and Conditions (https://cloud.xm-
cdn.com/static/pdf/System-PDFs/XMGlobal-Client-Agreement-Terms-and-Conditions-of-Business.pdf?
v=313c762adea3d8e9f496a907cdeb9a31)

Legal: This website is operated by XM Global Limited with registered address at Suite 101, 63 Eve Street, Belize City,
Belize.

XM Global Limited, authorised and regulated by the Financial Services Commission (FSC) (license number 000261/397)
and Trading Point of Financial Instruments Limited, authorised and regulated by Cyprus Securities and Exchange
Commission (CySEC) (licence number 120/10), are members of Trading Point Group.

Risk Warning: Forex and CFD trading involves a significant risk to your invested capital. Please read and ensure you
fully understand our Risk Disclosure (https://cloud.xm-cdn.com/static/pdf/System-PDFs/XMGlobal-Risk-Disclosures-
for-Financial-Instruments.pdf?v=6294d0191b6f1461fc70859d40df1a71).

Restricted Regions: XM Global Limited does not provide services for the residents of certain countries, such as the
United States of America, Canada, Israel and the Islamic Republic of Iran.

XM does not direct its website and services to any individual in any country in which the use of its website and services
are prohibited by local laws or regulations. When accessing this website from a country in which its use may or may
not be prohibited, it is the user's responsibility to ensure that any use of the website or services adhere to local laws or
regulations. XM does not affirm that the information on its website is suitable to all jurisdictions.