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How To Take Advantage of Fibonacci Retracements When You are Trading.

Posted by strudy on Oct 19th, 2009

If you have been trading for a while and have used some Technical Analysis you would by now have heard of Fibonacci Retracements.

Fibonacci, was actually named Leonardo of Pisa. He was born in Pisa, Italy,home of the Famous Leaning Tower of Pisa around the time of 1175 A.D. Historically he is recognized as the greatest European mathematician of the middle ages.

He is also credited with introducing the Arabic-Hindu numeric system to Europe. He also has been attributed to introducing the decimal system as well. These have become the basis of mathematics that we are currently using today. One very bright boy.

So What Does Fibonacci Retracement Mean?

This is a term that is used in technical analysis that relates to the hypothesis that a stock’s asset’s price will retrace a large portion of an original move and will find support or resistance at the key Fibonacci levels before it continues on in the original direction it started from.

These levels are produced by drawing in a trendline between the two extreme points and then by dividing the vertical distance by the key Fibonacci ratios of 23.6%, 38.2%, 50%, 61.8% and 100%.

These areas are regarded as trend retracement points. The most typically held theory is that a 38.2% retracement of a trend is a failed reversal and that the overall trend will continue. A retracement to the 61.8% mark signals that the retracement is the beginning of a new trend. The 50% level is used for different strategies if it is confirmed by several other signals.

Fibonacci numbers, as with all technical indicators should never be just used by themselves. They should always be combined with other indicators so as to make a complete trading system to trade with.

I believe that Fibonacci numbers should be a part of every traders list of indicators. They do on the whole seem to be exceedingly accurate. So if by chance you are not currently using them it may be worth your while to take a look at Fibonacci Retracements.

Chris Strudwick is a successful share trader on the Australian Stock Market Visit his weblogs at both http://www.asxnewbie.com AND http://www.aussie-retiree.com/ for more free articles and useful information about the stock market.