Fibonacci Studies

From Forexpedia

Fibonacci studies are geometrical representation of nature's law and human behavior that can be applied, almost without limit, to market data series, whether cash currencies/Forex, futures, index products, stocks or mutual funds. Each shape possesses unique characteristics in determining when the battle between bulls and bears is approaching a critical phase and which side is likely to win it.

Most Fibonacci studies are based on 3-wave patterns (A-B-C corrective patterns). The first impulse wave A is followed by the second corrective wave B that doesn’t penetrate a point from which wave A started. The third continuation wave C goes in the direction of wave A and signals formation of the 3-wave pattern.

Fibonacci studies are technical analysis tools based on the Fibonacci sequence. The Fibonacci sequence generates numbers based on the sum of the two preceding numbers in the sequence: for example, the first six numbers in the sequence are 1, 1, 2, 3, 5, 8. Fibonacci sequences are mathematically important for several reasons, chief among these the fact that any Fibonacci number multiplied by 1.618 tends to equal the next number in the Fibonacci sequence. This 1.618 proportion, also known as the "golden ratio", describes many patterns in seemingly disorderly natural processes, often including foreign exchange market trends.

Fibonacci studies use this regularity to generate a number of different graphs meant to analyze a market in terms of levels of support and resistance. There are four popular studies: Fibonacci arcs, fans, retracements, and time projections. However, a number of other studies exist, including Fibonacci ellipses, spirals, and channels. Additionally, certain of the Fibonacci studies (arcs and fans, most frequently) can be combined in a single projection, with the strongest levels of support and resistance theoretically occurring where the projection lines cross.

The most common percentages used to generate Fibonacci studies are 38.2%, 50% and 61.8%, but other Fibonacci numbers can also be used in certain of the projections.