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The Fibonacci Series was discovered by Leonardo Pisan, an Italian mathematician born in 1170. He discovered a sequence of numbers that was seen a in nature a lot. The series is really simple, every number in the sequence is the sum of the two preceding numbers. So the first few numbers in the series are: 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377.

Before we explain the use of Fibonacci in technical analysis, we have to clarify the Fibonacci ratios. These are based on the distance between two Fibonacci numbers. If we take one number and divide it by the next number in the sequence, we get a ratio of 0.618. Note that the first few numbers in the sequence get a different result, but the further you go in the sequence, the closer it comes to 0.618.

If we divide a number by the number two places to the right, we get a ratio of 0.3819. Dividing the number by the one three places to the right gets us 0.2352.

These three ratios correspond to the Fibonacci levels 61.8%, 38.19%, 23.52%. Up to today it remains a mystery why these number are important, and why markets seem to care about these numbers. But that is not the point, just make sure you know these three levels and integrate them into your technical analysis.

So how can this be used in trading? Practically every chart software offers a tool to draw the Fibonacci levels. You use it by projecting it on a chart from the market bottom to the top. Take a look at the following example (based on real data from an oil futures chart):

So the 0% level is set at the market bottom, and the 100% line is drawn at the market top. We can now see that at the important Fibonacci levels there’s a lot of reversals (indicated by the squares). The most interesting thing to look at is at the current point. It touches the 61.8% Fibonacci level, which could indicate a reversal. This might be a good trade opportunity to buy.