Fibonacci is a huge subject and there are many different Fibonacci studies with weird-sounding names but we’re going to stick to two: retracement and extension.
Then the second and third numbers are added again to form the fourth number.
The ratio of the last number over the second-to-the-last number is approximately equal to 1.618.
It appears many times in geometry, art, architecture.
Fibonacci Extension Levels
You won’t really need to know how to calculate all of this. Your charting software will do all the work for you.
Fibonacci retracement levels work on the theory that after a big price moves in one direction, the price will retrace or return partway back to a previous price level before resuming in the original direction.
Since so many traders watch these same levels and place buy and sell orders on them to enter trades or place stops, the support and resistance levels tend to become a self-fulfilling prophecy.
Again, since so many traders are watching these levels to place buy and sell orders to take profits, this tool tends to work more often than not due to self-fulfilling expectations.
In order to apply Fibonacci levels to your charts, you’ll need to identify Swing High and Swing Low points.