We'll be using Fibonacci ratios a lot in our next trades, so it's best if you study them now.

There are many mixed studies on Fibonacci with odd-sounding names, but we'll stick to two terms: retracement and extension.

## Who is Leonardo Fibonacci?

The Fibonacci theory was discovered by Leonardo Fibonacci, an Italian mathematician.  He discovered a unique series called the Fibonacci sequence: 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144 ...

The Fibonacci sequence is obtained by starting with the number 1 followed by the number 2 and then adding the numbers 1 and 2 to get the number 3. Then adding the numbers 2 and 3 to get the number 5 and so on.

Uniquely, if you divide one number by the next number, you will get a decimal number of 0.618 (after rounding up).  For example, 34 : 55 = 0.618.

If we divide one of the numbers in the Fibonacci sequence by the previous number, we will always get the same result, which is 1.625 (or 1.62 after rounding).  For example, 55 : 34 = 1.62.

And if you divide two numbers randomly with a small composition divided by a large one, you will get 0.382.  For example, 34 : 89 = 0.382

These numbers are called the golden ratio.

### Fibonacci retracement

0.236, 0.382, 0.500, 0.618, 0.764

### Fibonacci extension

0, 0.382, 0.618, 1,000, 1.382, 1.618

You don't need to know how to calculate all of this.  Chart software will do all this work.  Apart from that, we also have a Fibonacci measuring tool that will magically calculate those levels.

However, it is always good to understand the basic theory of each indicator.  Who knows someone asks, you can immediately answer.

The function of Fibonacci retracement is to look for potential areas of support and resistance.

Since many traders are buying and selling in the same area, these points can be considered as support and resistance positions.  This indicator tends to be a symptom of a self-fulfilling prophecy.

Traders use the Fibonacci extension to find profit levels.

Most charting software provides Fibonacci retracement and extension indicators.

The application of Fibonacci on the chart is to identify Swing High and Swing Low points.

Swing high is the highest point of the level on the right and left side.

Swing low is the lowest point of the level on the right and left.

I understand?  Don't worry, we'll explain it further, but the most important thing is to be able to draw a few pips using the Fibonacci indicator in the next lesson.