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Fibonacci Retracement Formula for Retracement and Projections for Profit
One of the important indicators and visual guides in technical trading is the Fibonacci retracement formula. To understand something about this useful technique we probably need to know a few things about the man Fibonacci and his special sequence. This Italian mathematician from the 13th century is recognized as showing the Western world this interesting string of numbers. In this sequence, each number is the sum of the preceding two numbers. For example, begin with 0 and 1. The next number would be 1, then 2, 3, 5, 8...and so on.
Within this sequence are ratios and number relationships that have proven useful in studying all things natural and man-made. The Fibonacci retracement formula enters the picture when the formula is applied to technical analysis.
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Percentages within the sequence include approximately 38 percent and approximately 62 percent. Analysis has shown that stock movement will often retrace one of these percentages before reversing.
For example, suppose a stock moves upward to point A then retraces to 38.2 percent of that move before going up again. This is the indicator point that traders look for. The same stock may rise to point A then retrace to point B, which is 61.8 percent of that upward move before going on the rise again. It just so happens that in the Fibonacci sequence you can divide one number by the next and get that 62 percent number. Another division step results in a 38 percent level. These points have been shown over and over in trading charts, thus we have the Fibonacci retracement formula.
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