Who and what is Fibonacci?
Leonardo Fibonacci was an Italian mathematician who once entered a mathematical competition and had to work out an equation for the reproduction of rabbits. This gave rise to a numbered sequence where the sum of the previous two numbers equals the next. i.e. 1,1,2,3,5,8,13,21,etc. Within this numbered sequence the value of the following number is 1.618 of the last and the previous number works out at 0.618 times the next.
This ratio has been called the ?golden section? or ?golden mean.? It has been found that these ratios appear in nature and all around us. The golden section plays an important part in the structure of DNA and atomic particles as well as the shape of our galaxies, ocean waves and our bodies.
Other important numbers are 0.382 and 0.5.Put as percentages these numbers translate to 61.8%, 38.2% and 50%.
These percentages are very often used by the financial markets to calculate where important retracement levels might be found in many time frames. Some may think that all this seems like hogwash but over the years it has become a self-fulfilling prophecy with turning points occurring at these levels so often that Fibonacci levels are offered by almost every good financial package available.
Most moves react as waves, some small and others larger. In order to advance in any major move the retracement of the last substantial move must be less than the whole move itself. By taking the high and low of that move a charting package will overlay the Fibonacci grid on the chart so that a trader can spot a potential turning point at these levels. In the example shown I placed the Fibonacci grid on the last major move from $68-$69 and was presented with the red grid marking out the three major Fibonacci pullback points.