# Fibonacci Analysis

The Fibonacci analysis technique is used by traders to understand support and resistance levels of a stock price. By mapping these highs and lows, traders can contextualize stock price movement and be able to respond appropriately.

## Fibonacci Sequence

The Fibonacci sequence is the underlying principle behind the Fibonacci analysis. The sequence is one of the most famous mathematical theories and is derived by adding the first two numbers of the sequence. The Fibonacci sequence has been observed in nature and is regarded as an important component in the evolution of life. Proponents of the Fibonacci analysis have argued that because stock market prices are driven by the desires and motives of traders, this collective psychology can be mapped (and thus predicted) by the Fibonacci sequence.

## How it Works

The Fibonacci analysis method is based on the principle that markets will retrace a portion of a price movement. These price shifts follow a certain known pattern and thus can be predicted. Fibonacci retracement is calculated by taking the vertical distance between the highest point and the lowest point and dividing it with the Fibonacci ratios. The two polar ends of the retracement are 0% which is considered the start and 100% that is considered the complete reversal of the earlier movement.

## Support and Resistance Levels

The key purpose of doing Fibonacci analysis is to determine support and resistance levels. The resistance level refers to the highest point a stock price reaches before market forces exert downward pressure on it. Similarly, support level refers to the lowest point a stock price will go before new traders entering the market exert upward pressure on the stock price. Traders use these levels to help stop losses and to help them determine the best price for a stock at various points of the cycle.