"The Fibonacci sequence (1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, etc.)" would make a great title for a future Dan Brown novel. As ubiquitous as his books at the bookstores, the Fibonacci sequence of numbers and ratios is found throughout the natural world. R.N. Elliott also recognized the presence of the Fibonacci ratio in financial markets when he discovered the Wave Principle in the 1930s.
Fibonacci ratios and multiples have many practical applications, but I'd like to focus on how to apply Fibonacci math to forecast price retracements in real-world trading.
In his latest eBook entitled Commodity Trader's Classroom, (download your FREE copy now) Elliott Wave International's Senior Commodity Analyst Jeffrey Kennedy has this to say about Fibonacci retracements:
"Financial markets demonstrate an uncanny propensity to reverse at certain Fibonacci levels. The most common Fibonacci ratios I use to forecast retracements are .382, .500 and .618. On occasion, I find .236 and .786 useful, but I prefer to stick with the big three. You can imagine how helpful these can be: Knowing where a corrective move is likely to end often identifies high probability trade setups."
The chart above shows Corn's 2005 price action. As you can see on the left-hand side, after advancing from the June low and reaching a high in July, prices fell to retrace to the .500 Fibonacci ratio level. Corn then rallied into a major top, fell, and then the upward correction that followed reversed after having retraced around .382 of the decline off the July high.
In Orange Juice, we see an example of a .786 retracement from the high in July that same year. Prices then rallied from the July low to reach a high in October, and then retraced just past the .618 level before advancing once more.
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