Fibonacci Numbers Work In Forex Trading

Posted by Richard U. Olson On November - 22 - 2008

by Richard U. Olson

Leonardo of Pisa, aka the mathematician “Fibonacci”, published his Fibonacci sequence in 1202. Fibonacci came upon his now very famous sequence of numbers when he was trying to breed rabbits and figure out how many pairs of rabbits he would have at the end of one year based upon their breeding behavior. This is just the kind of no-nonsense approach that Forex traders are into.

So you see, what many people mistakenly take as a mere mathematical abstraction, just “fooling around” with numbers, is rooted in very real-world applied mathematics. To state things very basically, the Fibonacci sequence can be used to detect and describe otherwise hidden patterns in the world around us.

It works really well while investing. Why? Well, based on the mass behavior of investors there are various hidden patterns in the stock market. Perceptive investors know this. Investment aphorisms such as “The best time to buy is when there’s blood in the streets” and “Buy low and sell high” work well. However, they also relate to understanding the investment markets hidden patterns.

The reason that investment market patterns are so well hidden is because “up close” they cannot be seen. Day to day, hour to hour fluctuations in the investment markets cannot be predicted with any accuracy. But certain overall trends that extend over longer periods of time definitely can be. And savvy investors, including Forex traders, have successfully been using Fibonacci’s number sequence to take advantage and make big profits.

Using the Fibonacci sequence involves a series of numbers. Each following number is the sum of the two numbers before it. It progresses like this 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, and into infinity. There are numeral interrelationships within these numerals. For example, take any number; it is roughly 1.618 times the number before it. Anciently the Greeks found number 1.618 reprehensive of the golden ratio which is the supreme essence of balance. This balance is the fundamental strategy of profitable investing

Arcs and retracements are two of the most widely used applications of the Fibonacci series by investors, including Forex traders.

Fibonacci charts are created through a technique comprising three curved lines that are drawn for the purpose of anticipating key resistance and support levels as well as areas of ranging. First, an invisible trendline is drawn between two points (typically these are the high and low for a given time period). Then, three curves are drawn so as to intersect this trendline at the key Fibonacci levels of 38.2%, 50%, and 61.8%. Transaction decisions are made at the point where the price of the asset crosses through these key levels.

Now, a retracement, in investing, refers to a reversal in the movement of a stock’s price–a reversal which is enough to counter the stock’s prevailing trend. Advanced successful investors pay intense attention to retracement possibilities and patterns. The Fibonacci retracement analyzes the likelihood that a financial asset’s price will see a larger than average retracement and then come to support or resistance at the key Fibonacci levels before it then continues on in its original direction. A trendline is drawn between two extreme points; then, its vertical distance is divided by the key Fibonacci ratios of 23.6%, 38.2%, 50%, 61.8%, and 100%.

Traders use Fibonacci retracements to determine strategic points for placing their transactions, target prices and stop-loss points. There are other tools which use retracement techniques, chief among them Elliott Wave Theory, Gartley patterns and Tirone levels.

The Fibonacci formula simply works and is useful while investing. Forex traders worldwide are finding it successful while using it.

About the Author:

Richard U. Olson uses the state of the art Forex Expert Advisor and he recommends it to make consistent profits in the Forex markets. Grab his FREE e-course on Forex Trading Tips to realize your financial dreams. You can get a unique content version of this article from the Uber Article Directory.