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Home » Forex Glossary » Fibonacci Lines

Fibonacci Lines

Leonardo Fibonacci, an Italian mathematician, created a number sequence, Fibonacci numbers, which are a sequence of said numbers in which each number in succession is the sum of the two previous numbers. The mathematical process, created in the 12th century, has had tremendous influence on all aspects of culture across the world.

Pertaining to Forex, these numbers help analysts to determine specific changes in the trends of the market. Ultimately the numbers:

1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144.....

All tend to lie near the lines of market graphs. Ultimately, these lines are called Fibonacci lines. There are four major types of studies done on Fibonacci's work – fans, time zones, arcs and retracements.

A retracement in a forex context is ultimately the likelihood that a specific asset in the finance industry and its price will revert to a prior move (based on the study of its past performance) or not. The number is evaluated based on whether it supports or rejects the various levels and numbers (Fibonacci lines) ultimately before it continues back to where it was intended.

Analysts study retracements by drawing various trendlines between a variety of points on a graph. After choosing two points, they divide them by the difference in the distance by various ratios that Fibonacci has determined (23.6%, 38.2%, 50%, 61.8% & 100%). Traders use these numbers and the analysis from them to determine where profits can be made in the market. Ultimately, utilizing Fibonacci lines is a key strategy in success in Forex.

When it comes to extensions, many traders use them with other patterns to help evaluate appropriate market prices for stocks and/or items. These analysis are determined by creating retracement charts for a said market. Extensions are utilized for future business decisions. Not only are they a method of analyzing, but also of assessing how much the business (market) will recover or not when a change in a price.

Most Forex experts believe that trading with Fibonacci numbers and/or utilizing his principles is ideal. The key to trading this way is to first, take small risks. This is especially important when you realize you're going to make a mistake at the beginning, recognize you have made the mistake, and adjust, re-adjust and again, until it's right.

These methods will help you determine what prices to maintain and ask for through understanding what the market will accept and if it will recover as a result of your failure in these decisions. Ultimately, the Fibonacci principle (numbers) is used throughout architecture, the arts, and the stocks & forex markets. Try it out for yourself. Many experts swear by this method and it's remarkable how accurate it has been, but it is intelligible to analyze its result for you before you put the process in place completely!