Fibonacci Number and Ratio Analysis
for example, divide the price range AB into 10 equal intervals, with each interval
occupying 10 percent of the price range. We could also divide the price range into
any other number of psychologically significant intervals, like thirds, fourths, or
eighths, as a way of measuring the amount of downside or upside retracement
from its peak or trough and to forecast potential support or resistance levels with-
in an observed price range. The greater the psychological attraction of a certain
retracement percentage level, the greater the probability that traders would react
at that level, helping to create potential support in downside retracements and
potential resistance in upside retracements. The stronger the perception that a
certain retracement percentage level is significant, the greater will be the potential
for a stronger reaction at that level, resulting in more reliable support and resis-
tance. Having a cluster or concentration of Fibonacci retracement levels around a
price level increases the potential of creating a stronger reaction or barrier to price
around that price level. These clusters or concentrations are referred to as Fibo-
nacci confluences. We shall learn more about supportive and resistive confluences
in a subsequent section. See Figure 10.15.
As observed in Figure 10.15, we could use any psychologically significant per-
centage retracement construct to mark the amount of price decline from peak A.
Notice that the 50 percent retracement level runs through three of the retracement
setups in Figure 10.15. This is the reason why the 50 percent retracement level
is of great psychological significance and importance, as it is a common factor
in three of the most widely used percentage retracement constructs in technical
analysis. Both Gann and Dow recognized the significance of the 50 percent re-
tracement level in the financial markets.Figure 10.15 Percentage Downside Retracements within a Price Range.