What are 'Fibonacci Numbers/Lines'

The Fibonacci numbers and lines are technical indicators using a mathematical sequence developed by the Italian mathematician Leonardo Fibonacci. These sequence of numbers, starting with zero and one, are created by adding the previous two numbers. For example, the early part of the sequence is 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, and 144.

BREAKING DOWN 'Fibonacci Numbers/Lines'

The Fibonacci numbers are significant because of the so-called golden ratio of 1.618. In the Fibonacci sequence, any given number is approximately 1.618 times the preceding number. This golden ratio is ubiquitous in nature where it describes everything from the number of veins in a leaf to the magnetic resonance of spins in cobalt niobate crystals.

Fibonacci Numbers/Lines in Finance

Many traders believe that the Fibonacci numbers and golden ratio play an important role in finance. In particular, many traders are focused on three percentages based on the golden ratio, including 38.2%, 50%, and 61.8%. These ratios are created by dividing the next highest number (e.g. 89/55 = 0.618 and 13/34 = 0.382). Using this technique, traders can calculate percentages as high or low as needed.

These percentages are applied using many different techniques:

  1. Fibonacci Retracements - These are horizontal lines on a chart that indicate areas of support and resistance.
  2. Fibonacci Arcs - These are compass-like movements stemming from a high or low that represent areas of support and resistance.
  3. Fibonacci Fans - These are diagonal lines created using a high and a low that represent areas of support and resistance.
  4. Fibonacci Time Zones - These are vertical lines into the future designed to predict when major price movements will occur.

Example of Fibonacci Retracements

Fibonacci retracements are the most common form of technical analysis based on Fibonacci numbers, which can be seen in the example chart above. The usage of the Fibonacci studies is somewhat subjective since the trader must use highs and lows of their choice. When building trading systems, traders may choose to select a high and a low during a set period of time.

Many traders use Fibonacci numbers and lines in conjunction with other forms of technical analysis. For example, traders may look for conformation of a breakout from a Fibonacci retracement by looking at on-balance volume or the relative strength index (RSI). These studies may also be used in conjunction with chart pattern analysis, such as ascending triangles or flags to calculate take-profit or stop-loss points along the way.

RELATED TERMS
  1. Fibonacci Fan

    A Fibonacci fan is a charting technique using trendlines keyed ...
  2. Fibonacci Channel

    The Fibonacci channel is a variation of the Fibonacci retracement ...
  3. Fibonacci Arc

    Fibonacci Arcs are half circles that extend downward from the ...
  4. Retracement

    A retracement is a temporary reversal in the direction of a stock's ...
  5. Tirone Levels

    Tirone levels are a series of three sequentially higher horizontal ...
  6. Technical Indicator

    Technical indicators are mathematical calculations based on the ...
Related Articles
  1. Investing

    Taking The Magic Out Of Fibonacci Numbers

    Uncover the history and logic behind this popular trading tool.
  2. Trading

    Advanced Fibonacci Applications

    Extensions, clusters, channels and more! Discover new ways to put the "golden ratio" to work.
  3. Trading

    Using a Fibonacci Retracement

    The Fibonacci retracement is the potential retracement of a financial asset's original move in price.
  4. Trading

    Top 4 Fibonacci Retracement Mistakes to Avoid

    Learn how using Fibonacci incorrectly can have disastrous consequences. Find out which common moves to avoid.
  5. Trading

    How to Calculate Bitcoin's Next Price Move

    Technical analysis can offer a roadmap to where Bitcoin prices are headed next.
  6. Investing

    Using Fibonacci to Analyze Gold (GLD, GC)

    Use Fibonacci studies to analyze gold by picking out hidden harmonic levels that can provide major support or resistance.
  7. Trading

    3 Technical Tools to Improve Your Trading

    Find out how volume, the Aroon indicator and Fibonacci numbers can improve your profits.
  8. Trading

    HYG Continues Downward After Breakdown From Rising Wedge

    The iShares iBoxx High Yield Corporate Bond ETF has continued to move downward since its breakdown in late January.
  9. Trading

    Applied Optoelectronics Stock Ready to Bounce

    The stock has reached oversold weekly technical readings and could add 10 to 15 points in coming weeks.
RELATED FAQS
  1. What is Fibonacci retracement, and where do its ratios come from?

    A Fibonacci retracement is a popular tool that can be used to identify support and resistance levels, and place stop-loss ... Read Answer >>
  2. Why is the Fibonacci Retracement important for traders and analysts?

    Find out why traders and analysts in financial markets use Fibonacci retracement to help identify support and resistance ... Read Answer >>
  3. What is the difference between fundamental and technical analysis?

    Fundamental analysis and technical analysis, the major schools of thought when it comes to approaching the markets, are at ... Read Answer >>
  4. What do the bracketed numbers following a technical indicator mean?

    In technical analysis, it is common to see a series of numbers following a given technical indicator, usually in brackets. ... Read Answer >>
Trading Center