What is the Fibonacci Series?
- The Fibonacci series is a sequence of numbers starting from zero arranged so that the value of any number in the series is the sum of the previous two numbers.
- The Fibonacci sequence is: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610… upto infinity. Also, if any number in the series is divided by the previous number, then the ratio is always approximately 1.618 or the Golden Ratio.
- The Golden ratio can be found in animal bodies, the human face, galaxy formation, flower petals, fruits etc.
- This series also shows a remarkable amount of consistency when it comes to division. When any number in the series is divided by the preceding number, then the percentage is 61.8%. Similarly, when any number in the Fibonacci series is divided by numbers two places higher, then the figure arrived at is 38.2%. Also, when a number in the Fibonacci series is divided by a number 3 place higher, then the result would be 23.6%.
Fibonacci Series in Stocks
Fibonacci ratios are applicable in stock charts. ‘The retracement level forecast’ is a technique that can identify up to which level retracement can happen and the Fibonacci ratios help the trader identify the extent to which this is possible. Fibonacci retracement refers to a technical analysis for determining support and resistance levels in stocks.
How does Fibonacci retracement work?
- Fibonacci retracements are movements in the chart that go against the trend. To use the Fibonacci retracements, it is essential to identify the 100% move first. After this, the Fibonacci retracement tool must be used to connect the peaks and the troughs.
- Fibonacci retracement levels such as 61.8%, 38.2%, and 23.6% act as a potential level up to which a stock can correct and shows the points at which a trader can enter the market. These inflection points are where traders expect some action.
- Unlike moving averages, Fibonacci retracement levels are static and do not change.
