Do you know who Leonardo Fibonacci is? Now, when you think of the name "Leonardo," perhaps you think of Leonardo da Vinci, but unlike Leonardo da Vinci, Leonardo Fibonacci did not paint the Mona Lisa. No, Leonardo Fibonacci was a mathematician who lived from about 1175 to 1250. He was well known in his day and contributed greatly to the world of mathematics. One of the things he did was that he introduced the decimal system to Europe.
He also studied a sequence of numbers that are known today as the "Fibonacci numbers." Alternatively, they are known as the "Fibonacci sequence."
The Fibonacci sequence begins with a zero and one. Each new number is the sum of the two previous numbers; for instance, zero plus one equals two, one plus two equals three, two plus three equals five, and so on.
Therefore, the first numbers in the sequence appear as follows: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, ad infinitum.
Fibonacci discovered that this series of numbers and their ratios to each other occurred throughout nature and in fact are incredibly commonplace in the world.
So what does this have to do with forex trading? Well, the ratios that the Fibonacci numbers displayed are also apparent in the price movement of currencies, as well as in stocks and other types of investments.
Although it's too detailed to go into here, there are three numbers you need to concentrate on from this sequence. They are 0.382, 0.500, and 0.618. There are others as well, but these are the most important.
These numbers help to calculate what are called "retracement levels." Many traders use retracement levels when they need to figure out where they should place buy and sell orders. It works like this:
Let's assume that the price of a currency pair, or a company stock, is trending upward. The history says that prices tend to hit a peak and then go into temporary reversal. Then, they continue to trend upward. This is where Fibonacci numbers come into play.
When a currency is trending, the price can be expected to reverse back to one of the Fibonacci numbers. Then, it "bounces" back to its original level or nearly so to continue the trend. Assuming you forecast this right, you can buy just before the upward trend continues and profit handsomely.
Whatever the online trading platform you use, it should give you the means to chart the Fibonacci numbers. To do this, you draw a line from a low point to a high point. Retrace the levels will automatically be mapped on the chart for you.
There are the things to consider besides trading when the price hits a particular Fibonacci number.
For instance, you don't know at what retracement level the price will stop. If you choose 0.382 and it drops to 0.618, you could lose a great deal. Additionally, if you choose the wrong high or low point, the retracement levels will not reflect what actually happens and will be of no use to you.
Finally, even though Fibonacci numbers are a good tool, sometimes they don't forecast accurately at all. Again, remember that many variables come into play in the forex market. Therefore, don't rely just on one method, like Fibonacci numbers, to predict what price movement is going to be.
You might not have heard of Leonardo Fibonacci. He was a well known mathematician who lived in Italy between 1175 and 1250. He's responsible for a number of significant contributions to mathematics as we know it, including the introduction of the decimal system to Europe. He also studied a particular sequence of numbers, now known as the Fibonacci Sequence.
This sequence starts with zero and one. Each new number is the sum of the two numbers that have gone before. That means that the second number is one. Since one and zero added together equal one, this is the third number. The first numbers in the Fibonacci sequence are zero, one, one, two, three, five, eight, thirteen, twenty-one, thirty-four, fifty-five, eight-nine, a hundred and forty-four, etc. The sequence theoretically continues into infinity.
The interesting thing about the numbers in this sequence is how frequently they turn up in the world around us.
They even show up in Forex trading. Ratios found in the Fibonacci sequence can be seen in currency price moments. They also appear in the price movements of stocks and other types of investment. The big three numbers you should pay attention to in Forex trading are 0.382, 0.5, and 0.618.
There are plenty of other numbers, but these are the most important. That's because they're used to calculate what are called retracement levels. These are used by a lot of traders to decide when they should place their buy and sell orders. This works as follows:
If you assume that the price of a pair of currencies, or even of a company's stock is trending upward, you'll also need to assum that prices will hit a peak. They'll then go into a temporary reversal, and resume the trend after a little while.
This reversal is where Fibonacci numbers come in handy. That's because the price of currencies that are trending can be expected to reverse back into a Fibonacci number, then bounce back, contining the trend. A correct forecast can allow you to buy in just before the upward trend starts up again. You could make a bit profit this way.
Use an online trading platform that can chart these numbers for you. Draw a line from a particular low point to a high point, and the retracement levels should be mapped automatically on a chart. Of course, it's not as simple as just trading when the price is the same as a Fibonacci number.
There are plenty of other things to remember. For one thing, you don't know what level the price will stop at. Choosing .382 when it could drop to .618 will cause you to lose a lot. Also, it's important to choose the right low and high points to make sure the retracement levels are correct.
Also, even though they can be incredibly accurate at times, Fibonacci numbers don't always work a hundred percent of the time. There are two many variables at work in the Forex market. You can't rely on just one method to find out what the prices are going to do.
Both Amar Mahallati & Ian Armstrong are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
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