# Fibonacci Trading

One technical analysis trading strategy that is gaining popularity with investors is Fibonacci Retracements.
Fibonacci Retracement trading involves using well-known ratios to help anticipate projected price corrections and is used by
day traders, swing traders, and position traders when trading stocks, Forex, commodities, and futures. Fibonacci ratios used in
technical analysis can be used to project entry and exit points in terms of both price and time.

### Fibonacci Sequence

Fibonacci Retracements are based on the Fibonacci sequence. The Fibonacci sequence is named after Leonardo of Pisa (aka Fibonacci)
who was a famous Italian mathematician born around 1170. Fibonacci published a sequence in which any given number within the
sequence is simply the sum of the previous 2 numbers within the sequence. The sequence begins with 0 and 1. The sum of 0 and 1 is 1.
The sum of 1 and 1 is 2. The sum of 1 and 2 is 3. The sum of 2 and 3 is 5, and so on.

The Fibonacci Sequence: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377 … Fn = F[n-1] + F[n-2].

### Fibonacci Retracements

The sequence in and of itself is not used in Fibonacci trading but instead is used to derive key Fibonacci ratios.
The ‘Golden Ratio’ or ‘Golden Mean’ is calculated by dividing any number in the sequence by the 1st number to the right.
For example, 144 divided by 233 equals 0.618026. 233 divided by 377 equals 0.618037. Applying this formula as the sequence
approaches infinity results in the ratios converging at 0.618, also known as the Golden Ratio.

Dividing any number in the sequence by the 2nd number to the right results in all ratios converging at 0.382.

Dividing any number in the sequence by the 3rd number to the right results in all ratios converging at 0.236.

These key ratios are often described in terms of percentages and are used when projecting how far a stock may retrace (pull back) from a trend before reversing and continuing to move in the original direction of the trend. These ‘legs’ of the price action are commonly referred to as A-B, B-C, and C-D legs. The A-B leg is the main trend line starting at the lower end of the range to the higher end before the retracement occurred. The B-C leg is the retracement at which the underlying security reversed direction at which time traders will pay particular attention to determine if the price approaches (and ultimately reverses) one of the key Fibonacci levels. The C-D leg is where the price once again moves in the direction of the original trending direction (A-B leg).

### Self-Fulfilling Prophecy

Fibonacci numbers are commonly recognized in nature, such as the growth pattern of leaves on a stem or the spirals of a shell.
Fibonacci retracement levels may not be important so much because of their commonality with Fibonacci numbers found in nature but more
so as a self-fulfilling prophecy due to their popularity amongst traders and automated trading systems. As a hypothetical example,
if a large number of traders start buying a stock that has gone from $100 to $150, retraced back to 61.8% (150 - ((150-100) * 0.618)), or $119.1,
then Fibonacci traders will likely take notice, verify the reversal using other technical analysis indicators such as volume, candlesticks,
MACD, stochastics, etc. and place their buy order at that level if their other indicators show a reversal is probable. The key to note
here is that Fibonacci retracement levels by themselves should not be used as sole indicators and should be used in conjunction with other indicators.

### FiboChart

In order to visualize the various retracement levels on a chart you will need software that can both calculate the Fibonacci levels
in terms of price as well as graph the retracement levels on your chart. FiboChart is a tool designed to pinpoint natural reversal
points and profit targets using Fibonacci Retracement and Extension levels. FiboChart is an overlay (transparent window) that can be
used on any linear chart and provides retracement, extension, and pivot point calculators as well as Fibonacci retracement and extension
lines. FiboChart also supports custom retracement and extension levels so that you can add your own levels to your charts. We invite
you to try out FiboChart. If you have any questions, comments, or suggestions please let us know by emailing us at
support@fibochart.com.