Few words about Fibonacci numbers, because this site is all about Fibonacci.
Fibonacci numbers are sequence of numbers which starts from 0:
0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144 and so on…
This sequence is also called Fibonacci sequence.
Where fibonacci numbers came from?
Each number is a sum of two previous numbers (first and second number from the left).
3 is a sum of 2 and 1, because 2 and 1 are on the left of number 3.
Two numbers on the left of 34 are 21 and 13. So we add 21 to 13 and we have 34, and so on.
Sequence above ended on number 144. What number is next in Fibonacci sequence? We take two last numbers: 144 and 89 and add them together. As a result we have 233, our next number in Fibonacci sequence.
From these numbers (Fibonacci sequence) came Fibonacci ratio.
Fibonacci ratio is found by dividing one number by the number that follows it in Fibonacci sequence. For example:
and so on…
This particular ratio: 61.8% (0.618) is the most important ratio and is often called the golden ratio.
But we have more ratios, as you have noticed. Where came the other ratios from? It is simple, from dividing the number which is two and three places on the right.
Two places on the right from 8 is 21.
Three places from 8 is 33.
So here we have – the most important ratios: 23.6%, 38.2%, 61.8%.
Ratio is also called retracement level. That is because there is a chance that price will stop and reverse at one of these levels.
Traders like to use few more levels with them, so the most popular full retracement levels list goes like this:
23.6%, 38.2%, 50%, 61.8%, 78%
50% did not come from Fibonacci sequence, but it’s important level, so traders added it to retracement levels.