Fibonacci

Hi John, thanks for the question.

Fibonacci is a technical analysis tool. While there is a range of tools that is based on Fibonacci sequence numbers, retracement and extensions are the most popular among the traders. 

The Fibonacci sequence looks like this: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89 and so on.

Based on this logic, each number is around 61.8% of the next number, roughly 38.2% of the following number, and approximately 23.6% of the number after that. 

Both Fibonacci retracements and extensions are used to identify support and resistance levels, set stop-loss orders, or target prices. The main retracement levels used by traders are: 23.6%, 38.2%, 50%, 61.8% and 78.6%. On the other hand, the main extensions are 127.2% and 161.8%. 

Extensions are used when the price action breaks through support and resistance, to point out where it is likely to stop. It shows the levels beyond the Ground Zero. 

It is important to note that Fibonacci retracements are rather subjective. There is no general rule that forces all traders to draw the same start and ending point i.e. there could be different versions of the Fibonacci retracement/extensions around, and each trader will trade his own plan. Therefore, it is advised to mix signals generated by Fibonacci with other technical indicators.