Chapter

10

Fibonacci Number

and ratio analysis

L e a rNiNg O b j eCt i v e s

After studying this chapter, you should be able to:

■ Understand the proper application of Fibonacci numbers and ratios to price action

■ Calculate Fibonacci retracement, extension, expansion, and projection levels

■ Identify Fibonacci‐based resistive and supportive confluences

■ Use Fibonacci time projection to forecast potential market reversals

■ Understand the relationship between Fibonacci, Dow, and Gann levels

■ Understand how chart scaling affects different Fibonacci operations

■ Identify the issues associated with trading Fibonacci price and time targets

t

he application of Fibonacci numbers and ratios in technical analysis is perva-

sive. It is probably one of the most popular and widely used overlay indicators

in technical analysis. In this chapter, we shall study the application of Fibonacci

numbers and ratios to the financial markets and how we can use them to identify

potential key reversal and breakout levels.

10.1 The Fibonacci Number Series

Leonardo Fibonacci, in his historic 1202 book entitled Liber Abaci (Book of the

Abacus), introduced to Western civilization a special sequence of numbers known

as the Fibonacci series. Before learning how Fibonacci numbers and ratios are

used in the financial markets to forecast potential support and resistance levels,

let us first turn our attention to the source and derivation of these interesting

numbers and ratios.