Fibonacci Retracement
Definition:
Leonardo Fibonacci was a mathematician born in 12th Century Italy. His study of Fibonacci numbers (a sequence of numbers where each number is the sum of the two previous numbers) is often applied by modern technical analysts to find support and resistance in stock charts. When one Fibonacci number is divided by the next number in the sequence, the result is approximately 62%. When that Fibonacci number is divided by the following number, the result is approximately 38%. These are the key Fibonacci retracement levels.
The principle behind a Fibonacci retracement is that after a stock moves upward or downward, the price will often retrace or correct some of this movement. Many technical analysts believe that the amount of retracement will often correspond to one of the Fibonacci levels. The five horizontal lines represent percentages of 100%, 62%, 50%, 38% and 0% (with 62 and 38 being Fibonacci numbers).
Interpretation:
The Fibonacci Retracement indicator in modern day charting programs draws a Fibonacci Retracement between the most recent peak and valley that is at least 10% apart This indicator can be useful for identifying support and resistance levels when stocks correct upwards or downwards from a high.
