# Chapter 10, Part I. Mysterious Fibonacci. Page 4 of 6

Discussion in 'Complete Trading Education- Forex Military School' started by Sive Morten, Dec 15, 2013.

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1. ### Sive Morten Special Consultant to the FPA

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Pipruit: Wow! Cool! But why do these ratios work on financial markets?​
Commander in Pips: There is no definite and clear answer on this question, and as you understand this answer will never appear. But, as this ratio the one that is building in nature of all being on the Earth, the basic thought about it is as follows. The price is driven by human senses – fear and greed. And the prevailing one or another comes to the market in a way of price movement. Since human feelings and emotions are also natural substance, the way how they becomes stronger and weaker are also a natural subject and, hence the subject of 1.618 ratio.
Pipruit: Hm…​
Commander in Pips: Finally this is not so important. I just can tell you, that these numbers work and must be used in trading.
Pipruit: So and how we will use them?​
Commander in Pips: Currently for simplicity let’s say that numbers that equal or less than 1.0 are used for calculation of retracement. Those are, that equal or above 0.618 – for extensions. So, tell me, what numbers we will use for retracement and which one for extensions. So, tell me, what numbers we will use for retracement and which one for extensions
Pipruit: Let’s see. For retracement they will be - 0.382; 0.5; 0.618; 0.786; 0.886; 1.0. For extensions are – 0.618; 1.0; 1.272; 1.618; 2.0; 2.618.​
Commander in Pips: Yes, that’s it.
Pipruit: But, Commander, why we use 1.0 as for retracement as for extensions. And, in general, why we couldn’t use, say 0.5, for extension?​
Commander in Pips: Well, the major difference here is in direction of using these numbers. Retracement is an opposite move to previous one; extension is a continuation of previous move after some retracement. So, Fibonacci retracement levels are treated as support or resistance and used by traders for entering or exiting from trades or placing stop orders. There are so many traders using these levels, so they become a self-fulfilling prophecy.

The Fibonacci extension levels most time are used as profit objectives - profit taking levels.

Pipruit: Ok, I’ve got it. And how to build these levels on the chart?​