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Fibonacci Retracement and Expansion Patterns-Trading System-November 16, 2021

Fibonacci analysis is a popular tool among technical traders. It is based on the Fibonacci sequence identified by Leonardo Fibonacci in the 13th century. The Fibonacci sequence is as follows:

0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987, 1597, 2584, 4181, 6765, …………………

As the Fibonacci number increases, a constant relationship is established between adjacent numbers. For example, if you divide the former number by the latter, you get a ratio of Fn-1 / Fn each time, which is close to 0.618. Similarly, dividing the latter number by the former Fn / Fn-1 yields approximately 1.618. These two Fibonacci ratios of 0.618 and 1.618 are considered the golden ratio. You can use these golden ratios to start a Fibonacci analysis. However, many technical traders use an additional Fibonacci ratio derived from the golden ratio. The calculation of each Fibonacci ratio is well known, so the calculation of all available Fibonacci ratios is shown in Table 1-1.

type ratio Calculation
Major 0.618 Fibonacci number of Fn-1 / Fn
Major 1.618 Fibonacci number Fn / Fn-1
Major 0.786
Major 1.272
secondary 0.382 0.382 = 0.618 * 0.618
secondary 2.618 2.618 = 1.618 * 1.618
secondary 4.236 4.236 = 1.618 * 1.618 * 1.618
secondary 6.854 6.854 = 1.618 * 1.618 * 1.618 * 1.618
secondary 11.089 11.089 = 1.618 * 1.618 * 1.618 * 1.618 * 1.618
secondary 0.500 0.500 = 1.000 / 2.000
secondary 1.000 Unity
secondary 2.000 Fibonacci prime
secondary 3.000 Fibonacci prime
secondary 5.000 Fibonacci prime
secondary 13.000 Fibonacci prime
secondary 1.414
secondary 1.732
secondary 2.236
secondary 3.610
secondary 3.142 3.142 = Pi = circumference / diameter of circle

Table 1-1: Fibonacci ratios and corresponding calculations for deriving each ratio.

In fact, Fibonacci analysis in financial transactions is very popular. It’s just popular. At the same time, it is the basis for many other common technical analyzes such as harmonic patterns and Elliott wave patterns. Like support resistance analysis, Fibonacci analysis is probably the most popular technical analysis among traders. There are two important techniques for Fibonacci analysis. The first technique is Fibonacci retracement. The second method is Fibonacci expansion. Looking at other books, you may find confusing explanations about retracement, extension, extension, and projection. For example, the book may have two different names, one with a ratio above 100% and one with a ratio below 100%. We’re not using confusing naming conventions here, but because it’s simple, we’ll just stick to retracement and extensions. Both retracement and expansion require two important peaks and troughs to get in the chart. When using a mechanical setup for Fibonacci analysis, the best way to get started is to use a peak trough transformation with a zigzag indicator. Let’s start with retracement. As a simple example, we will use the golden ratio of 61.8%. For retracements, there are two cases: trough-peak retracement and peak-trough retracement. For trough peak retracement, a retracement level of 61.8% acts as a support level. Prices reverse in the correction phase to follow the previous bullish move.

Figure 1-1: Example of trough peak retracement in the EURUSD H4 timeframe.

About this article

This article is an excerpt from the draft version of the book: A Science Guide to Price Actions and Pattern Trading (Trends, Cycles, Fractal Wave Wisdom). The full version of this book can be found at the link below.

You can also use Harmonic Pattern Plus in MetaTrader for technical analysis. Harmonic Pattern Plus is an advanced Fibonacci analysis indicator for trading.Below is a link to Harmonic Pattern Plus

The following is the landing page for Optimum Chart (Standalone Charting and Analytical Platform).

Fibonacci Retracement and Expansion Patterns-Trading System-November 16, 2021 Fibonacci Retracement and Expansion Patterns-Trading System-November 16, 2021

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