Fibonacci Analysis

1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89…

The Fibonacci sequence has a number of interesting qualities:

1. The sum of any two consecutive numbers equals the next number in the series.

2. The ratio of any number to the next number in the series approaches 0.618 after the first 4 numbers.

3. The ratio of any number to its preceding number in the series approaches 1.618, or the inverse of 0.618.

4. The ratio of alternate numbers approaches 2.618 (or its inverse, 0.382 if moving in the descending order of the series).

While the Fibonacci ratios have been adapted to various technical indicators, their utmost use in technical analysis remains the measurement of correction waves.

Elliott found that very often, correction waves extend to erase 0.382, 0.5, or 0.618 of a preceding trend. However, when the trend resumes a price target for the next wave can also be determined using Fibonacci ratios using a 138.2%, 161.8% or 200% extension of the previous wave.

Fibonacci retracements can be used as SAR stop-and-reverse levels in order to time an entry, take profit or set stop-loss levels. Once a Fibonacci level has been breached, prices are likely to continue at least as far as the next Fibonacci level.

In reality it is not always so easy to spot the correct Elliott wave pattern, nor do prices always behave exactly according to this pattern. Therefore it is advisable for a trader not to rely solely on Fibonacci retracements, but rather to use them in conjunction with other technical tools.

USD/JPYFibonacci Retracement Example:

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