Fibonacci numbers are pervasive in the universe and were originally derived by Leonardo Fibonacci. The basic Fibonacci ratio or “Fib ratio” is the Golden Ratio (1.618). Fibonacci Numbers are a sequence of numbers where each number is the sum of the previous two numbers.

The series of Fib Numbers begin as follows: 1,1,2,3,5,8,13,21,34,55,89,144,233,317,610…..

There are plenty of materials and books about the theory of how these numbers exist in nature and in the financial world. A list of the most important Fib ratios in the financial world which are derived by squaring, square-roots and reciprocating the actual Fibonacci Numbers are depicted below:

Key Set of Fibonacci Derived Ratios in Trading are:
0.382, 0.500, 0.618, 0.786, 1.0, 1.272, 1.618, 2.0, 2.62, 3.62, 4.62

Secondary Set of Fibonacci Derived Ratios in Trading are:
0.236, 0.486, 0.886, 1.13, 2.236, 3.14, 4.236

Most trading software packages have Fibonacci drawing tools which can show Fib retracements, Fib Extensions and Fib Projections. In addition. Fib Numbers are also applied to “time” and to “price” in trading.

The chart above illustrates Fibonacci trading from the Russell Emini futures (ER2) 10 minute chart. First, a retracement is shown in the shaded area for XA to AB. Secondly, an extension of XA to AB is shown. Thirdly, the projection of the XA length is made from B to C. In the forgoing projection example, B was retraced to .62 of XA and then a projection of 1.27 to 1.62 of XA swing is expected. C was formed at 1.38 of XA.

Fibonacci Clusters

Fibonacci Clusters

A confluence of Fib. retracement numbers signifies a stronger area of support and resistance. The confluence of multiple Fibonacci retracements in a fairly tight area are computed using prior swings both retracement and extensions with certain criteria. Then each Fib retracementlextension level is grouped to generate a confluence within some threshold to find Fibonacci clusters in an area. These “cluster” levels are more significant than a single fib retracement itself. The trades are either initiated or closed at these confluence levels.