The stock market is an unforgiving place for anyone who does not prepare well for decisive action. Anyone who believes that they can make a killing on stocks by instinct alone will find out very quickly that you cannot afford to take a slapdash approach to the medium. The very least that is required for anyone hoping to make a positive impact on their bank balance by playing the market is an awareness of how to understand data, and this awareness is aided hugely by an ability to decipher graphical representations of such data. The Fibonacci sequence and the numbers related to it have, improbably as it sounds, a lot to do with the stock market.
Countless graphical representations of the behavior of a stock are pored over before the committed investor makes a move in the market. A wise investor will not look at one method of representing data on a graph and make their investment simply based on that. In order to get a rounded interpretation it is important to analyze several forms of graphical representation. Graphs depicting the relationship between a stock's behavior and the important Fibonacci numbers are, more and more, forming a major element of this dependence on graphical representation.
Whether by accident or design, the number .618 - related to what Fibonacci's followers term the "Divine Proportion" or "Golden Ratio" - seems to hold significance in the stock market just as it does in art and in nature. Its inverse correspondent, .382, has a similar effect, although people are unsure why this is. Theories that have been advanced include the presence of superstition even in this most cynical of fields, and one that may just be the most likely - that the human brain is hardwired to respond to the Divine Proportion whether this response is conscious or subconscious.
In nature and art, the Divine Proportion is seen as an exemplar of stunning natural beauty. It features heavily in concerns of symmetry, and the chances are that its importance to the stock market has everything to do with the human need or desire for things to be symmetrical. Therefore when a stock falls or rises to a point where it is either .382 or .618 of the difference between its high and low points, there is a tendency for the stock to cling to that price. When it is away from those points, it exhibits a tendency to rise or fall to one or the other. Theories will continue to abound as to why this is so, but it seems like human beings just like it that way.
Using Fibonacci retracement techniques to forecast price action is very simple and takes no time at all to apply to any strategy you are currently implementing. Fibonacci application may seem confusing but its very simple. Check out our website for a free download that will have you pinpointing reversals and extensions immediately.
Think of a Fibonacci retracement as a "retracing" of price action. Think of "retracing your foot steps" to find a set of keys you lost. Its "going back" to where it once was. A 100% retracement is a move right back to where we started.
A fibonacci extension is beyond 100% - If price was $50 and it fell to $40 then went back to $50 it retraced by 100%. Beyond the 100% mark is what we call Fibonacci extensions.