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Leonardo of Pisa is a mathematician known in his identified key numbers in the thirteenth century is called as Fibonacci short for filius Bonacci.

The word “Fibonacci” is the short term of the Latin “filius Bonacci”, used in his book entitled Libar Abaci, which means “the son of Bonaccio.”

Fibonacci retracement is a popular tool usually used by technical traders. However, Fibonacci’s sequence of numbers is not as essential as the mathematical relationships, which is expressed as ratios.

In technical analysis, Fibonacci retracement is made by taking two extreme points (major peak and trough) on a stock chart, which divides the vertical distance by the key ratios of 23.6%, 38.2%, 50%, 61.8% and 100% as shown in the chart below.

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Fibonacci Strategies of Forex Traders

• Buying near the 38.2% retracement level with a stop-loss order positioned slightly lower than the 50% level.

• Buying near the 50% level with a stop-loss order positioned slightly lower than the 61.8% level.

• When executing a sell position near the peak of the large move, using the Fibonacci retracement levels as traders aimed at take profits

• If the market retraces nearly one of the Fibonacci levels and then resumes its previous move, higher Fibonacci levels of 161.8% and 261.8% is used in order to determine potential future support and resistance levels if the market movement goes beyond the high/low that was touched before the retracement.

Further, the 50% level is only a partial part of the Fibonacci number sequence, but it is included as the trading experience in the market is broad, which retraces about half a major move before resuming and continuing its trend.

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Common Fibonacci Retracements

The Fibonacci retracement levels of 38.2% and 61.8% are the most commonly used by traders. The 50% retracement level is usually included when traders are jotting down notes of Fibonacci levels on charts.    

Fibonacci Levels

Fibonacci retracements are known as price levels, which identifies key ratios like 61.8% and 38.2%, in order for traders to determine support and resistance levels that could serve as market reversal points.

The ratios are mainly derived from the Fibonacci number sequence, which comprises of these succession numbers: 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144 ... and so on. The succeeding number in the sequence is the sum of the two preceding numbers (89+144), in which the next Fibonacci sequence will be 133.

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