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What are Fibonacci levels?


To understand a Fibonacci level, first understand the Fibonacci series. It’s quite simple. It’s the sequence of numbers you get by adding the two numbers just before. This gives you the sequence 1,1,2,3,5,8,13,21...


With this Fibonacci levels can then be calculated, starting with the ratio of one number in the sequence to the number just after it. This ratio is approximately 0.618 (approximately). As a further example, the ratio of two alternate numbers is (about) 0.382. By doing further calculations like this, two sets of Fibonacci levels can be calculated:


Fibonacci retracements: 0.236, 0.382, 0.500, 0.618, 0.764

Fibonacci extensions: 0, 0.382, 0.618, 1.000, 1.382, 1.618


How do Fibonacci levels apply to Forex trading?


The theory is that as a currency price varies, it will establish a support or a resistance level at one of the principal Fibonacci levels, calculated in relation to its initial price. So for example, if the trend for an exchange rate is upwards, then according to the theory you would make a trade that you would close if the price level fell back as far as the support level indicated by the Fibonacci retracement level.


Online trading platforms often calculate such levels for you using graphics software to display this on your PC screen. However, before committing to a trade based on this information, it’s often a good idea to compare several different indicators to see if you get the same story from all of them.


What’s the link with Elliott Wave Theory?


Elliott Wave theory uses Fibonacci levels and the notion of successive phases or “waves” to indicate where you should get in or out of a certain kind of trade. The model that Elliott Wave theory uses contains a five-wave sequence in which traders start to make this trade and more and more traders follow, and a three-wave sequence that follows, in which traders stop making the trade and start making the opposite trade (for example, selling instead of buying).


Within the first five “positive” waves, it is the Fibonacci retracement levels that determine how each wave finishes and how the next one starts. For the three waves that come after, it is the Fibonacci extension levels that predict the way that these waves then correct and reverse the five waves that came before. .