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While the markets and media were obsessed with last week's Fed nonevent, they missed a huge move in gold.
In the run up to the FOMC meeting, gold was in the grips of a two-week slump. But right after Yellen announced that there would be no rate hike, gold smashed through several resistance levels, including the "38.2" line (you'll see why that's important), and posted the biggest gains of the past two weeks.
Now, we've talked about resistance lines before. But what you may not know is that everything you trade – gold, oil, stocks, bonds, even currencies – follows the same pattern involving that line.
The pattern can tell you when a pullback is forming, the size of the move in the markets, and even how long it's likely to last.
Learn how to use this pattern, and you need never miss a pullback again.
Here's how every trader can use this to make as much money as possible…
It's Called the "Fibonacci Retracement Ratio," and It's Big
Leonardo Bonacci of Pisa, better known as Fibonacci, was the sharpest mathematician of his age. In 1202, he published "The Book of Calculation," which introduced Hindu-Arabic numerals to the West.
The book was a hit.
Think about it – the enterprising Italian merchants of the time must've been overjoyed to rid their fat ledgers of tedious, clunky Is, Vs, Xs, Ls, Cs, and Ms and ("all new for A.D. MCCII") upgrade to sleek and versatile 1s, 2s, 3s, 4s, and 5s.
That money-making, time-saving innovation alone gets Fibonacci a place in history, but he made an even more remarkable discovery – an uncanny sequence of numbers – the Fibonacci sequence and the related "Golden Ratio" – that can be found almost everywhere in nature and art, from tree branches, to flowers, to honeybee hives, to the distance between your knuckle and fingertip, to the Mona Lisa.
That's amazing, but as traders, the really amazing thing is that we can use Fibonacci's sequence to make money on pretty much every tradable instrument over any length of time. I'll show you how.
But first, let me show you this Fibonacci sequence I've been talking about:
It goes as follows: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89 (and so on). Each number in the sequence is the sum of the two preceding numbers. So, for example, the next number above would be 144 (55 + 89), and the next would be 233 (89 + 144).
Even more impressive is that each number is about 1.618 times greater than the preceding number. And the relationship between all these numbers in the sequence is the foundation of common ratios when studying retracements (the percentage by which the market corrects itself).
That 1.618 brings us to the "Golden Ratio" (also called the "Golden Mean") I mentioned a moment ago.
You determine it by dividing a number in the sequence by the number that follows it. For example, 55/89= 0.617, 34/55= 0.618, 21/34= 0.617, and so forth, making 61.8% the key Fibonacci ratio.
There's also two other key ratios technicians use:
23.6%, which you can find by dividing one number in the sequence by the number three places to its right.
38.2%, which you can find by dividing one number in the sequence by the number two places to its right.
Anything you trade (whether it's stocks, bonds, commodities, futures, or currencies) tends to pull back to these percentage retracement levels before resuming the overall trend either up or down, which is exactly why technical analysts love the Fibonacci sequence: It's easy to spot – and trade – trend reversals right down to the decimal.
How to Find Fibonacci Retracements on a Stock Chart
About the Author
Tom Gentile is one of the world's foremost authorities on stock, futures and options trading.
With more than 25 years' experience trading stocks, futures, and options, Tom's style of trading systems and strategies are designed to help individual investors propel themselves past 99 percent of the trading crowd.