Fibonacci
retracement is a potential retracement in the asset’s original move in price. Fibonacci
retracement levels are based upon the relationship between the Fibonacci
numbers. A Fibonacci series starts with 0 and 1 and then it is constructed by
adding the previous two numbers to get next one (0,1,1,2,3,5,8,13,21,….). Key Fibonacci
ratios are 23.6%, 38.2%, 50%, 61.8% and 100%. These numbers can be derived as
follows. These ratios represent the relationship between Fibonacci numbers. For
instance, dividing a number in the series by the second number that follows, we
get 38.2 and dividing a number by the third number in the series we get 23.6. These
numbers fit better as we move up in the sequence.
For
a financial asset the Fibonacci levels are created by drawing a trendline
between two extreme points and then dividing the vertical distance according to
the Fibonacci ratios (23.6%, 38.2%, 50%, 61.8% and 100%). The Fibonacci ratios are
commonly used to decide price targets, based upon which traders plan their
trading strategies.