If you're into mathematics then i'm sure you've heard of the Fibonacci theory, if not don't worry we'll explain it all. The Fibonacci theory was created by an Italian mathematician named Leonardo Fibonacci, Leonardo discovered a simple series of numbers that created ratios describing the natural proportions of things in the universe.These numbers are apparent in the following number sequence : 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144...This sequence of numbers is calculated by starting with 0 followed by 1 and then adding 0 + 1 to get 1, the third number. Then, adding the second and third number (1 + 1) to get 2, the fourth number, and so on. After the first few numbers in the sequence, if you measure the ratio of any number to the following higher number, you get 0.618. For example, 34 divided by 55 equals 0.618. If you measure the ratio between alternate numbers you get 0.382. For example, 34 divided by 89 = 0.382. Luckily you don't have to do make all these calculations yourself, most charting platforms will have a Fibonacci tool you can use, you could also use a Fibonacci Calculator. These are the ratios that you need to keep in mind:
Fibonacci Retracement Levels
0.236, 0.382, 0.500, 0.618, 0.764
Fibonacci Extension Levels
0, 0.382, 0.618, 1.000, 1.382, 1.618
How to use Fibonacci Retracements to enter a Trade
One thing you should know about the Fibonacci tool is that it works best in a trending market, when using the tool the idea is to buy when price reaches a Fibonacci support level in an uptrend and sell at a Fibonacci resistance level when the market is trending downwards. When using the Fibonacci tool you must first identify the recent significant swing highs and swing lows. In a down trend click on the most recent swing high and drag the cursor to the most recent swing low, and it's just the opposite or an up trend,click on the most recent swing low and drag the cursor to the most recent swing high. Below is an example of how the Fibonacci retracement tool looks when plotted on a chart, as you can see it's plotted onto an uptrend, you can also clearly see the Fibonacci lines plotted, the Fibonacci retracement levels were 0.7955 (23.6%), 0.7764 (38.2%), 0 .7609 (50.0%), 0.7454 (61.8%), and 0.7263 (76.4%).
The expectation is that if price retraces from the recent high it will find support at one of the Fibonacci retracement levels, in the picture below you can see that price does exactly that and finds support at the 38.2% level. You should note that this isn't always the case and price does not always bounce from these levels, sometimes price blows straight through them.