Fibonacci Retracement Tool: Understanding the Basics of Fib Ratios

3 min read
Nenad Kerkez

Nenad Kerkez

Head of Trading

Fibonacci retracement tool is a very popular tool in the world of Forex trading. You might have heard of the tool or perhaps you already use it on occasion.

Today our article reviews the basics of the Fib retracement tools. It will explain what are the main ratios.

What does Fibonacci level actually represent?

Simply said, the Fibonacci retracement tool provides support and resistance (S&R) levels between two reference or swing points. These points are tops and bottoms of the recent bullish or bearish move.

See the chart below for a Fibonacci tool that has been placed between top and bottom because the swing is bearish (price action is showing lower low and lower high)

Fig1: Fibonacci retracement Arrangement (Bearish Move)

In mathematics, Fibonacci numbers are the numbers in the following integer sequence, called the Fibonacci sequence, and characterized by the fact that every number after the first two is the sum of the two preceding ones:

1st Number = 0

2nd Number = 1

3rd Number = 0+1 = 1

4th Number = 1+1= 2

5th Number = 1+2 = 3

6th Number = 2+3 = 5 and so on…..

The rest of the sequence is:

0,1,1,2,3,5,8,13,21,34,55,89,144, and the list goes on.

The Fibonacci sequence is named after Italian mathematician Leonardo of Pisa, known as Fibonacci. In 1202 his book Liber Abaci introduced the sequence to Western European mathematics.

Fig 2: Fibonacci retracement Arrangement (Bullish Move)

What are Fibonacci ratios?

As mentioned earlier, The Fibonacci sequence of numbers is: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, etc. Each number is the sum of the two preceding numbers. One of the remarkable characteristics of this sequence is that each number is approximately 1.618 times greater than the preceding number.

  • The 23.6% ratio is found by dividing one number in the series by the number that is three places to the right. For example: 8/34 = 0.2352
  • The 38.2% ratio is found by dividing one number in the series by the number that is found two places to the right. For example: 55/144 = 0.3819
  • The key Fibonacci ratio of 61.8% is also referred to as “the golden ratio” or “the golden mean” – is found by dividing one number in the series by the number that follows it. For example: 8/13 = 0.6153, and 55/89 = 0.6179.
  • The Fibonacci ratio of 50%, 78.6 and 88.6% levels are of much importance. These are referred to as best reversal levels in the Forex market.

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