Fibonacci series are a mathematical series invented by Italian mathematician Leonardo Bonacci. These series quickly gained popularity for the golden ratio derived from it and the spiral formed as a result of this series. In this newsletter, we discuss the Fibonacci series, Fibonacci retracement and the golden ratio.

The Fibonacci Series- How it is calculated

Fibonacci series starts with the first two numbers of the number system- 0 and 1.

The idea behind this series is simple: Every number is the sum of the preceding two numbers.

So, we have 0,1. The next number in the series will be 0+1 = 1. The series stands at 0,1,1. The next number will be 1+1=2. The series now stands at 0,1,1,2. Similarly, the series continues as 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89……...

Any given number is the sum of the preceding two numbers.

This series is called the nature’s series. This is because, when these numbers of the series are arranged in the form of squares, where the length of each side of the square is the number, they form a spiral. This spiral is similar to the shape of the various elements that occur in the nature, for example shape of flowers, cyclone, shells, pinecones etc

The golden ratios

From the Fibonacci series, a series of golden ratios can be derived. To derive these golden ratios, each number must be divided by the last number in the series. For example, if the series is 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89……..., then the ratios will be 55/89, 34/89, 21/89 ……… The result will be 0.618, 0.382, 0.235…..respectively. This series of golden ratios stands true no matter how many numbers in the series. If, say the series was 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144……… then, 89/144 = 0.618, 55/144=0.382……

These golden ratios are very unique feature of the Fibonacci series.

How does a trader use Fibonacci series?

The Fibonacci series and the golden ratios are related to the nature. Some traders thought why not apply this to trading. As a result, Fibonacci Retracement was invented. Only retracements after a bullish swing are explained here.

Fibonacci retracement tries to predict the extent of the retracement in terms of the golden ratios from the start of the retracement. This is done by first calculating the length of the swing before the retracement. Then this length is multiplied with the various ratios and subtracted from the top, i.e the start of the retracement.

As a result, the trader obtains various levels till which the price can be expected to retrace. These levels usually act as Area of value, where crucial price action can take place.

Observe the chart below of MAXHEALTH. Observe how the price was in an uptrend and started a retracement. The use of Fibonacci retracement levels shows the price retraced till the ratio 0.618 and resumed the bullish trend.

Observe the chart below of PIDILITE. The price formed a Cup and Handle pattern. The distance between the bottom of the Cup and the start of the Handle gave an idea about how much the price would retrace to form a handle.

Fibonacci retracement works best when combined with pattern with retracement as a part of it, for example Flag and Pole pattern or the Cup and Handle pattern, the shoulders of Head and Shoulder patterns.

When the higher timeframe is in a bullish trend, any bullish pattern in the retracement levels on the lower timeframe could mean end of the retracement.

Fibonacci retracements are not a complete trading system in themselves. They are only a level to keep an eye for. In my YouTube video, I have further explained Fibonacci ratios on charts. Make sure to check it out.