Fibonacci retracements are ratios used to identify potential price reversal levels. The ratios are found in the Fibonacci sequence with the most popular ones in trading being: 61.8% (typically rounded to 62%) and 38.2% (typically rounded to 38%).
These retracements can be combined with other measures like IV rank to identify possible trading opportunities.
The Fibonacci sequence is a string of numbers in which each of the proceeding numbers is derived by adding the preceding two numbers. 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55 etc. (55 is obtained by adding 34 and 21, 34 is obtained by adding 21 and 13 and so on). This sequence goes on to infinity.
When you divide a number by the previous number, it approximately is equal to 1.618 (13/8 = 1.625, 8/5 = 1.6, etc.). As the number increase, the close you will get to being exactly 1.618. 1.618 is often referred to by trades as the golden ratio. This ratio can be found throughout nature, architecture, art, and biology.
The inverse of 1.618 is .618 which is approximately what you get if you divide any numbers in the sequence by the next highest number. (34/55 = .6181, 21/34 = .6176, etc.). This is the basis for the 61.8% fibonacci retracement used in trading.
Where does the 38.2% retracement come from then?
When you divide any number in the sequence by another number in the sequence that is two place higher, it equals approximately .3820 (13/34 = .382, 21/55 = .3818, etc.). Also, note that 1-.618 = .382.
Retracements that fall into the 38.2%-50% range are considered to be moderate (the 50% retracement is not based on Fibonacci’s sequence, instead, it stems from Dow Theory’s assertion that the averages often retrace half of their prior move.
A 61.8% is considered the golden retracement (it is after all, based on the golden ratio).
Strategies: N/A
Products Discussed In This Episode: N/A
This video and its content are provided solely by tastylive, Inc. (“tastylive”) and are for informational and educational purposes only. tastylive was previously known as tastytrade, Inc. (“tastytrade”). This video and its content were created prior to the legal name change of tastylive. As a result, this video may reference tastytrade, its prior legal name.
tastylive content is created, produced, and provided solely by tastylive, Inc. (“tastylive”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, digital asset, other product, transaction, or investment strategy is suitable for any person. Trading securities, futures products, and digital assets involve risk and may result in a loss greater than the original amount invested. tastylive, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastylive is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparisons, statistics, or other technical data, if applicable, will be supplied upon request. tastylive is not a licensed financial adviser, registered investment adviser, or a registered broker-dealer. Options, futures, and futures options are not suitable for all investors. Prior to trading securities, options, futures, or futures options, please read the applicable risk disclosures, including, but not limited to, the Characteristics and Risks of Standardized Options Disclosure and the Futures and Exchange-Traded Options Risk Disclosure found on tastytrade.com/disclosures.
tastytrade, Inc. ("tastytrade”) is a registered broker-dealer and member of FINRA, NFA, and SIPC. tastytrade was previously known as tastyworks, Inc. (“tastyworks”). tastytrade offers self-directed brokerage accounts to its customers. tastytrade does not give financial or trading advice, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastytrade’s systems, services or products. tastytrade is a wholly-owned subsidiary of tastylive, Inc.
tastytrade has entered into a Marketing Agreement with tastylive (“Marketing Agent”) whereby tastytrade pays compensation to Marketing Agent to recommend tastytrade’s brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastytrade. tastytrade and Marketing Agent are separate entities with their own products and services. tastylive is the parent company of tastytrade.
tastycrypto is provided solely by tasty Software Solutions, LLC. tasty Software Solutions, LLC is a separate but affiliate company of tastylive, Inc. Neither tastylive nor any of its affiliates are responsible for the products or services provided by tasty Software Solutions, LLC. Cryptocurrency trading is not suitable for all investors due to the number of risks involved. The value of any cryptocurrency, including digital assets pegged to fiat currency, commodities, or any other asset, may go to zero.
© copyright 2013 - 2024 tastylive, Inc. All Rights Reserved. Applicable portions of the Terms of Use on tastylive.com apply. Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law, provided that you may download tastylive’s podcasts as necessary to view for personal use. tastylive was previously known as tastytrade, Inc. tastylive is a trademark/servicemark owned by tastylive, Inc.