The levels of support and resistance in the graphs are one of the most important components in the technical analysis . Many operators use resistors and brackets to identify entry and exit points on the market. If we want to determine these levels more easily a tool we can include are the levels of Fibonacci setbacks.
Leonardo Fibonacci da Pisa was a famous mathematician of the thirteenth century. He helped introduce the digital system into European countries, including zero positioning as the first digit on the numerical scale. Likewise, Fibonacci also discovered a numerical sequence known as the “Fibonacci sequence”. In this article we are not going to focus on Fibonacci sequence theory, which is described along with its applications in trading in the following article:
The Fibonacci theory in Forex trading
For now and for purposes of this article, suffice it to know that it is an infinite sequence of numbers whose form is as follows:
An extremely important property of this sequence is that after a certain number of numbers, the ratio of any number to the next major number is approximately equal to 0.618, whereas the inverse relationship, ie a number with its predecessor, is Approximately equal to 1.618. These two values, 0.618 and 1.618 are known as the Aura Ratio or the Golden Mean.
These proportions are all around us in the natural world. They appear in biology, art, music, architecture and many other fields. The following are some examples of how the Aúre Proportion manifests itself in the world around us:
- The shape of the sunflowers,
- The DNA molecule.
- The Hurricanes.
- The galaxies in outer space.
- Snail Shells.
- Card games.
In fact, well-known author William Hoffer wrote the following in the Smithsonian’s 1975 journal:
The continued presence of Fibonacci numbers and Aromatic Proportions in nature explains perfectly why the 0.618034 to 1 ratio is so pleasing in art. Man can see the image of life in art that is based on the Aurian Proportion.
Traders who know about Elliot’s Wave Theory know very well that it is based primarily on Fibonacci numbers and the Aurian Proportion.
Two technical levels of Fibonacci retracement percentages that are highly important in the market analysis are 38.2% and 62.8%. Many technical analysts track a “setback” in a bullish price trend from its beginning to its most recent peak. Other levels of significant setbacks include 75%, 50% and 33%. For example, if a trend starts at zero, goes up to 100 and then backs up to 50, this movement would be a 50% retreat. The same levels can be applied to a market that is downward trend and experiencing an upward correction.
One of the most fascinating elements about Fibonacci numbers, Aurian Proportion, and Elliot Waves when applied to the technical analysis of the market is that these principles are a reflection of the nature and behavior of humans. If there is one thing that many experienced market analysts agree on, it is that the patterns of human behavior and the patterns of market price movements are closely related.