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Fibonacci Numbers in Financial Markets.Explore Fibonacci Retracement and Fibonacci Time Zones

Price prediction and trend analysis in Financial markets using Fibonacci numbers, Golden Ratio, Fibonacci Retracement and Time Frames.

Fibonacci numbers in trading and including retracement analysis.
Fibonacci Retracement Levels

🙋‍♂️Hello dear readers, today the topic of our article is the Fibonacci sequence frequently used by traders in technical analysis. In this article, we will try to answer the following questions:

 ❓ What is the Fibonacci sequence?

 ❓ Why is it called the Fibonacci sequence?

 ❓ Where is the Fibonacci sequence used?

 ❓ How is the Fibonacci Series used in the financial market?


What is the Fibonacci sequence? 🤷‍♂️

Let's start with the first question. In the Fibonacci sequence, each number is formed by adding the two preceding numbers. 👀Let's take an example:

0, 1, 1, 2, 3, 5, 8, 13, 21, ... In this infinite series, each number is equal to the sum of the two numbers that come before it.

2 = 1+1;     3 = 2+1;     5 = 3+2;     8 = 5+3;     13 = 8+5;     21 = 13+8.

The Fibonacci sequence typically starts with 0 and 1, but it can also start with any other number. 👀For example:

7, 7, 14, 21, 35, 56, 91, ...

An image of the stunning Fibonacci statue, honoring the contributions of Leonardo Fibonacci to the world of mathematics.
Giovanni Paganucci's Monument of Leonardo da Pisa (Fibonacci), erected in 1863 within the Camposanto of Pisa.Source: Wikipedia

Why is it called the Fibonacci sequence?

🕵️‍♂️The Fibonacci sequence was discovered by Leonardo Fibonacci, a famous Italian mathematical genius. He encountered these numbers while investigating a problem related to the breeding of a rabbit population in a closed environment during the 13th century. 📗In his book titled "Liber Abacci," he explains the theory of the "golden ratio" and discusses how this series of numbers can be used to solve problems. The book also provides explanations of the mathematical properties and connections of the numbers that form the sequence. The name "Fibonacci sequence" is derived from Leonardo Fibonacci's own surname and is given in reference to him.


 👨‍🏫Where is the Fibonacci sequence used?

When we divide consecutive numbers in the Fibonacci sequence, the result tends to approach the value of 0.618 (approximately), while dividing a number by its preceding number yields a result close to 1.618 (approximately). These special ratios are known as the "Golden Ratio" and are derived through the Fibonacci number sequence. We can observe the traces of the Golden Ratio in various aspects of life and nature. For example, the numbers obtained by counting the seeds from the center of a sunflower and spiraling outwards in both clockwise and counterclockwise directions, the ratio between our index finger and the previous joint, and so on.

An example of the Golden Ratio's manifestation in nature, as observed in the arrangement of seeds in a sunflower, forming a mesmerizing spiral pattern.
A visual representation of how the Golden Ratio and Fibonacci numbers create a harmonious balance seen in the growth patterns of plants like the sunflower.

A visual representation highlighting the influence of the Golden Ratio and Fibonacci sequence in nature, including the proportional relationship between our index finger and its preceding joint.
Highlighting the Golden Ratio and Fibonacci numbers in natural forms, including human finger joints.

Fibonacci series is used in many fields, and below we have listed the most well-known applications:


 🌼Biology. Fibonacci numbers and ratios are encountered in natural formations such as branching patterns of plants, leaf arrangements, and flower structures. This can reflect the mathematical organization in the growth and development processes of plants.

 ➗Mathematics. The Fibonacci series has an important role in mathematical analysis and number theory. It is used in problems related to number theory and the exploration of the golden ratio.

🎨Art and Design. The Fibonacci series finds many applications in art and design. The golden ratio is considered aesthetically pleasing, and proportions, designs, and compositions are created based on the relationships with Fibonacci numbers.

 💻Programming and Data Structures. The Fibonacci series can be used in the field of data structures, algorithm design in programming, and pattern recognition problems. It is possible to write a program that calculates the Fibonacci series and create algorithms based on Fibonacci numbers. There is a data structure called the Fibonacci heap, which is based on the Fibonacci series.

 💰Finance. The Fibonacci series is used in technical analysis in financial markets. Fibonacci retracement and Fibonacci extension levels are used in the analysis of price charts to determine support and resistance levels.


How is the Fibonacci Series used in the financial market?

Numbers in the Fibonacci sequence exhibit special proportional relationships with each other. These ratios are 0 percent, 23.6 percent, 38.2 percent, 61.8 percent, 78.6 percent, and 100 percent. While traders don't have a direct relationship with the Fibonacci sequence, they believe that the ratio of 50 percent is also significant in the Fibonacci indicator, and therefore, they use this ratio. On your trading platform, you can perform analysis using various tools under the Fibonacci toolbar.

Fibonacci Retracement.

Fibonacci retracement levels are applied in both upward and downward trending charts. To apply Fibonacci retracement levels, you need to identify the highest and lowest points within a specific time period on a price chart of an asset. In an upward trend, the lowest point (bottom) will be 1, which corresponds to 100 percent, and the highest point (top) will be 0, which corresponds to 0 percent. After selecting the Fibonacci Retracement tool, you can draw from the bottom to the top using the mouse cursor, and the mentioned ratios will be applied to the chart.


A demonstration of how Fibonacci retracement lines on a price chart can aid in identifying potential support and resistance levels, providing insights into price patterns and potential reversals for GBP/AUD.
Fibonacci Retracement on a GBP/AUD price chart

The Fibonacci lines on the chart representing the GBP/AUD price indicate potential resistance and support levels. These levels can also be used to determine entry and exit points and to set stop-loss levels. Traders can consider Fibonacci retracement levels in an upward trend to make buy entries or determine stop-loss levels. Additionally, the Fibonacci indicator can be used to identify extension levels, which show how high an asset can rise after a corrective move.

Let's now see how it is used in a downtrend. In a downtrend, the situation will be reversed. The highest point will be 1, and the lowest point will be 0. This time, we will draw from the peak to the bottom, instead of from the bottom to the peak. Let's take a look at the example below:


A graphical depiction of how Fibonacci retracement tool can be used in a downtrend, along with extension levels, to forecast how far the price may decline following a correction. The example shown on the AUD/USD chart demonstrates multiple instances of price bouncing off support and resistance levels.
Fibonacci Retracement on an AUD/USD price chart

As you can see in the AUD/USD chart, the price is getting stuck at support and resistance levels several times. Traders can use this tool in a downtrend not only to determine retracement levels but also to identify extension levels, which can help predict how far the price of the asset may decline after a correction.


Fibonacci Time Zones⏱

Fibonacci time intervals are used to predict the time durations at which price movements within a specific time frame can reach significant points such as corrections or trend reversals. Fibonacci sequences are important tools used in financial analysis not only for analyzing price changes but also for analyzing time intervals. The numbers in the Fibonacci sequence represent the intervals between trend days, considering each number as a day. These numbers provide valuable information to analysts in determining the duration of fluctuations.

An example of utilizing Fibonacci time zones in financial analysis, allowing traders to forecast significant time intervals for price movements. The Fibonacci numbers, such as 1-1-2-3-5-8-13-21-34, are divided into trend intervals and analyzed for their duration. The NZD/USD chart serves as an illustration of this analysis.
Fibonacci Time Zones on  NZD/USD price chart

The Fibonacci sequence is obtained by adding consecutive numbers together, and the ratios between the numbers are used to determine time intervals. For example, Fibonacci numbers like 1-1-2-3-5-8-13-21-34 are analyzed by dividing them into trend day intervals. This analysis method provides investors and analysts with clues about how long price movements may last.

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