Human beings love to classify things into threes. Drinks come small, medium, and large. Steaks are prepared rare, medium, and well-done. We often take two steps back to take one step forward. This natural inclination to divide things into thirds applies to trading as well.
Most traders are aware Fibonacci ratios are present in everything from the organization of flower petals to the optimum spacing of facial f e a t u res. The two most common Fibonacci ratios are 38.2 percent and 61.9 percent.
Although some traders attach an almost mystical importance to Fibonacci numbers, there is a far more pragmatic approach to these percentages: They essentially divide price action into thirds.
Fibonacci ratios can be used to apply an incremental entry technique that helps reduce risk.
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