Fibonacci ratios are very important for the forex world, and we will be using them regularly in our projects. Hence, you must devote your mind on these ratios and adore them like you adore the meal cooked from your mother’s hand. Fibonacci itself is a good subject that has a lot of depth. In this article, we are going to talk about just a couple of concepts: Extension and retrenchment.
To get started, let us first tell you about the Leonardo Fibonacci. He isn’t a famous chef as many might think. Actually, he is an Italian, who is famous in mathematics and according to some; he is a super ultra geek.
He came across a fantastic moment when he found out a series of numbers that actually could create a ratio that was used to describe the natural proportions of the things in the world.
He used the following number series to discover ratios: 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, and so on.
To get the complete series, he applied the following trick: Adding first digits with the 2nd and this will make the third digit by itself. The addition rule then goes on for the whole series. For example: 1+1=2, 1+2=3, and so on.
Now it is the time to calculate the ratio of this number sequence. By measuring the ratio of any number to the next higher number, we will get .618. This number is obtained by dividing 34 by 55, which equals to .618.
You will get .382 in case you will try to estimate the ratio between two alternate numbers. For example, divide 34 by 89 which equals to .382. This explanation goes on for the whole series.
These ratios are named as “golden mean.” Now that’s enough from the number’s side, and now let’s move ahead. Following is the really important ratios which you must remember:
Fibonacci Extension Levels:
0, 0.382, 0.618, 1.000, 1.382, and 1.618.
Fibonacci Retrenchment Levels:
0.236, 0.382, 0.500, 0.618, and 0.764.
It is not necessary for you to know who these ratios will be calculated. The charting software is designed for this purpose that will calculate all the ratios on its own. Along with that, we offer a very useful Fibonacci calculator that will also do the similar job for you with ease. However, it is good to have basic knowledge of the theory behind such indicators. It will surely help you out in increasing your knowledge.
Traders mostly use Fibonacci retrenchment and extension levels. Since, a majority of people is using the same mechanism, so the resistance and support levels usually become very helpful.
Extension levels from the Fibonacci are being used by the traders to raise the level of their profit. Once again, when so many players are working on the same technique so it becomes very important and helpful.
Now days, a majority of the charting software includes both Fibonacci levels. To apply these levels effectively, a trader must be familiar with Swing low and Swing high points.
Swing high works like a candlestick which contains a minimum of two lower highs on the right and left side.
Swing low work like a candlestick that contains a minimum of two higher lows on the right and left side.