Fibonacci analysis is based on a series of numbers developed by Italian mathematician Leonardo Fibonacci in the the early 1200's while he was studying the Great Pyramid of Gizeh.
The fibonacci series is a numerical sequence
comprised of adding the previous numbers together, i.e.,
An interesting property of these numbers is that as the series proceeds, any given number is 1.618 times the preceding number and 0.618% of the next number.
Fibonacci numbers are commonly used in Technical Analysis with or without a knowledge of Elliot wave analysis to determine potential support, resistance, and price objectives. Fibonacci retracement is created by taking two extreme points (usually a major peak and trough) on a stock chart and dividing the vertical distance by the key Fibonacci ratios of 23.6%, 38.2%, 50%, 61.8% and 100%. Once these levels are identified, horizontal lines are drawn and used to identify possible support and resistance levels.
38.2% retracements usually imply that the prior trend will continue, 61.8% retracements imply a new trend is establishing itself. A 50% retracement implies indecision. 38.2% retracements are considered nautral retracements in a healthy trend.
The most popular Fibonacci Retracements are 61.8% and 38.2%. Note that 38.2% is often rounded to 38% and 61.8 is rounded to 62%.
Fibonacci Retracements can also be applied after a decline to forecast the length of a counter trend bounce.