Leonardo of Pisa, better known to us today as Fibonacci first introduced what we call the Fibonacci sequence to the west in his 1202 book Liber Abaci (the sequence was already known in Indian mathematics). He stumbled upon this sequence while attempting to estimate how many rabbits he would be able to breed in one year based on his knowledge of their breeding habits. This mathematical model is used by Forex traders today.
While many think of the Fibonacci sequence as a mathematical abstraction, it is grounded in a real world application. The Fibonacci sequence can be used to predict patterns which would not otherwise be apparent.
So how is the Fibonacci sequence applicable to currency investing? Savvy investors know that there are patterns to the movements of the stock and currency markets which can be seen by studying the past behavior of investors. The market truisms "buy low, sell high" is based on an understanding of these market 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.
The Fibonacci sequence is a series of numbers in which each successive number is the sum of the two previous numbers. So it goes 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, and into perhaps infinity. There are a number of interrelationships held within these numbers; for instance, any given number is approximately 1.618 times the preceding number, and 1.618 happens to represent the ancient Greeks' "golden ratio"--considered to be the supreme essence of balance (and balance is the ultimate key to successful investing).
The most common applications of the Fibonacci sequence for investment purposes are retracements and arcs.
A Fibonacci chart is made of three curved lines which represent support levels, key resistance and ranging. A trendline is first drawn between two points (generally the high and low points over a given period of time). Three curved lines are then drawn which intersect the trendline at the 38.2%, 50% and 61.8% points. Decisions about buying and selling are made at these points (i.e. - when the price of the commodity in question reaches these points).
In the world of investment, retracement relates to the reversal in movements of the price of a stock. An impressive reversal can counter the prevailing trend in the stock. Successful progressive investors focus strongly on the retracement patterns and possibilities. The Fibonacci method of retracement evaluates the prospects of the price of a financial asset being more superior than is average as well as supporting or resisting at key Fibonacci levels before continuing on its original course. Between the two extreme points a trendline is drawn and then its vertical distance by the ratios of 23.6, 38.2, 50, 61.8, and 100 percent, according to Fibonacci.
Multitudes of high-level traders gain with the Fibonacci retracement method. It aids them in finding the most strategic placement of transactions, their target prices and stop-losses. Gartley patterns, Tirone levels and the Elliott Wave theory are other technical tools that make use of retracement.
The reason that the Fibonacci sequence is used in investing is simple: it works! Forex traders in particular in particular seem to find it useful in making profitable trades.
While many think of the Fibonacci sequence as a mathematical abstraction, it is grounded in a real world application. The Fibonacci sequence can be used to predict patterns which would not otherwise be apparent.
So how is the Fibonacci sequence applicable to currency investing? Savvy investors know that there are patterns to the movements of the stock and currency markets which can be seen by studying the past behavior of investors. The market truisms "buy low, sell high" is based on an understanding of these market 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.
The Fibonacci sequence is a series of numbers in which each successive number is the sum of the two previous numbers. So it goes 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, and into perhaps infinity. There are a number of interrelationships held within these numbers; for instance, any given number is approximately 1.618 times the preceding number, and 1.618 happens to represent the ancient Greeks' "golden ratio"--considered to be the supreme essence of balance (and balance is the ultimate key to successful investing).
The most common applications of the Fibonacci sequence for investment purposes are retracements and arcs.
A Fibonacci chart is made of three curved lines which represent support levels, key resistance and ranging. A trendline is first drawn between two points (generally the high and low points over a given period of time). Three curved lines are then drawn which intersect the trendline at the 38.2%, 50% and 61.8% points. Decisions about buying and selling are made at these points (i.e. - when the price of the commodity in question reaches these points).
In the world of investment, retracement relates to the reversal in movements of the price of a stock. An impressive reversal can counter the prevailing trend in the stock. Successful progressive investors focus strongly on the retracement patterns and possibilities. The Fibonacci method of retracement evaluates the prospects of the price of a financial asset being more superior than is average as well as supporting or resisting at key Fibonacci levels before continuing on its original course. Between the two extreme points a trendline is drawn and then its vertical distance by the ratios of 23.6, 38.2, 50, 61.8, and 100 percent, according to Fibonacci.
Multitudes of high-level traders gain with the Fibonacci retracement method. It aids them in finding the most strategic placement of transactions, their target prices and stop-losses. Gartley patterns, Tirone levels and the Elliott Wave theory are other technical tools that make use of retracement.
The reason that the Fibonacci sequence is used in investing is simple: it works! Forex traders in particular in particular seem to find it useful in making profitable trades.
About the Author:
Richard U. Olson recommends the state of the art Fully Automated Trading System that he uses to make consistent profits in the Forex markets. Grab his FREE e-course on The Crucial Facts On Forex Trading to achieve your financial freedom.
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