What are Fibonacci Numbers?

Fibonacci numbers are a sequence of numbers where each number is the sum of the two preceding ones, usually starting with 0 and 1. The sequence typically starts as follows: 

0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, ...

The ratio between successive Fibonacci numbers tends to the golden ratio (approximately 1.618), which is often denoted by the Greek letter φ (phi). This ratio, and the sequence itself, has applications in various fields, including mathematics, art, nature, and finance.

Using Fibonacci in the Stock Market

In the stock market, Fibonacci numbers are often used in technical analysis through tools like

Fibonacci retracement levels and Fibonacci extensions. These tools help traders identify potential support and resistance levels, which can guide decisions on entry, exit, and stop-loss placements.

1.Fibonacci Retracement Levels:-

These levels are horizontal lines that indicate where support and resistance are likely to occur. They are derived from the Fibonacci sequence by identifying two extreme points on a stock chart, typically a peak and a trough, and dividing the vertical distance by key Fibonacci ratios such as 23.6%, 38.2%, 50%, 61.8%, and 100%.

 How to Use:

- Identify a significant peak and trough.

- Use a charting tool to draw a Fibonacci retracement from the peak to the trough.

- The levels derived (23.6%, 38.2%, 50%, etc.) can indicate potential support or resistance levels where the price might reverse or consolidate.

- Traders often look for confirmation from other indicators, such as moving averages, RSI, or MACD, before making a trade decision.

2.Fibonacci Extensions

-Fibonacci extensions are used to predict potential price targets after the  price has moved beyond the original peak or trough.

 How to Use:-

Similar to retracements, identify the significant peak and trough. 

- Extensions are typically drawn beyond the 100% level, with common levels being 161.8%, 200%, and 261.8%.

- These levels can be used to predict areas where the price might find resistance during an uptrend or support during a downtrend.

Practical Example:

Suppose a stock has risen from Rs100 to Rs150 and then retraced back to Rs120. 

- You could apply a Fibonacci retracement from the Rs100 low to the Rs150 high. 

- The 38.2% retracement level would be around Rs130, the 50% level around Rs125, and the 61.8% level around Rs120. 

- If the stock starts to move back up from Rs120, you might expect resistance around the Rs130-Rs135 range.