In 1202, an Italian mathematician called Leonardo of Pisa (Fibonacci) wrote about a sequence where each number is the sum of the two before it.
The magic ratios
Divide one number by the next and you get closer and closer to 0.618. Skip a number and you get 0.382. Skip two and you get 0.236. Flip it and you get 1.618, the "golden ratio".
These ratios show up in sunflowers, seashells, galaxies... and, traders swear, in how far markets pull back.
Is the universe secretly running on Fibonacci? Maybe. More likely: millions of traders draw the same levels, so price reacts there. Self-fulfilling magic is still magic!
Why traders care
Markets move in waves: a push, a pullback, another push. Fibonacci gives us a common map for how deep the pullback might go and how far the next push might travel.
- Key ratios: 23.6%, 38.2%, 50%, 61.8%, 78.6%, plus 161.8% for extensions.
- 50% isn't a Fibonacci ratio, but traders use it anyway.
- Fib works largely because so many people watch it.