You simply add the first number to the second number and get the next number, and so on.
Fibonacci in nature
Fibonacci sequences appear everywhere in nature. For example, the number of petals on a flower is usually a Fibonacci number:
? Lillies have 3 petals
? Wild roses have 5 petals
? Delphiniums have 8 petals
? Marigolds have 13 petals
? Chicory has 21 petals.
Try it yourself. The next time you see a flower, count the petals and chances are they will be a Fibonacci number.
Fibonacci in music
The sequence can be found in music or even on a keyboard:
? 2 black keys followed by 3 black keys equals 5 black keys
? There are 8 white keys which equals a total of 13 keys.
All these numbers are Fibonacci.
The golden ratio
If you divide one number in the sequence by the next number in the sequence, you get:
Divide: 1/1 2/1 3/2 5/3 8/5 13/8
To get: 1 2 1.5 1.67 1.6 1.625
Gradually these numbers get closer to the Greek letter 'phi' which is described as the golden section, golden ratio, or divine ratio of 1.61803.
The golden ratio has applications in science, beauty and nature.
It comes up over and over again when measuring portions in the body or even as a measure of beauty. It's found:
? when looking at spiral patterns in sea shells
? observing how rabbit populations multiply
? sunflower seed heads
? patterns on pine cones.
It's even applied to design: if you look at the shape of our credit cards, the portions are 1:1.618, which is the golden ratio.
Fibonacci and the sharemarket
Fibonacci followers also believe that the sharemarket moves according to this cycle.
Fibonacci charts
So how do you apply this sequence when you look at charts? You don't physically have to draw the lines. There are free charts on the web.
To use the Fibonacci tool, you need two points: the first point is the beginning of the trend and the second point is the end of the trend.
You can see that most of the significant peaks and troughs have occurred near these Fibonacci levels which are 0%, 23.6%, 38.2%, 50% (although 50% isn't strictly speaking a Fibonacci ratio), 61.8% and 100%.
Is 2700 the bottom of the market?
You often hear traders say that the S&P/ASX 200 will probably bottom at 2700. That's because 2700 is not only the level that the last bull market began but also because 100% is a Fibonacci ratio.
Just as in nature where the Fibonacci sequence occurs frequently but not always, in the markets Fibonacci also seems to occur frequently (but remember) not always.
So that's an introduction to the concept of Fibonacci. Some traders dismiss it ? the Fibonacci sequence is not 100% correct with the sharemarket. But it's certainly something that most traders pay some attention to.
