Fibonacci series are widely used for support and resistance in technical analysis and trading among Traders, that makes it powerful tool for building any strategy around Fibonacci numbers.
Fibonacci retracement is created by taking two points a major peak and a trough. Then the vertical distances are divided into key Fibonacci ratios i.e. 23.6%, 38.2%, 50%, 61.8%, 78.6% and 100%. After the levels are defined, horizontal lines are drawn to identify support and resistance levels.
The Fibonacci sequence of numbers are: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89 etc. identified by mathematician Leonardo Fibonacci in the 13th century. Each number in this sequence is the sum of two preceding numbers. Its important to notice that, each number is approximately 1.618 times greater than the preceding number.
The 23.6% ratio is found by dividing one number in the series by the number that is three places to the right. For example, 8 divided by 34 equals 0.2352.
The 38.2% ratio is found by dividing one number in the series by the number that is found two places to the right. For example, 55 divided by 144 equals 0.3819.
The 61.8% ratio is found by dividing one number in the series by the number that follows it. For example, 21 divided by 34 equals 0.6176 and 55 divided by 89 equals 0.6179.
Below is the Amibroker AFL to plot Fibonacci levels from 0 to 100%, this AFL can be used to develop any strategy on Fibonacci retracement.