Fibonacci Sequence pt.1

Leonardo Fibonacci was a 13th century Italian mathematician. He discovered a sequence of numbers where each number is the sum of the previous two. The first part of the sequence is as follows:

0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89… etc

Fibonacci’s sequence held within it the golden ratio; if you divide a number in the sequence by the previous number, then the result veers towards 1.618, its inverse being 0.618. If you divide a number by a number 2 ahead in the sequence, its value veers towards 0.382.

In short, Fibonacci’s sequence leads to a set of ratios which are used in the context of forex trading, notably: 0.236, 0.382, 0.5 and 0.618. The reason they are used is based upon the idea that the golden ratio explains natural phenomena like how pine cones are arranged or the spirals in shells form. If it can explain natural phenomena, then it might be able to explain human reactions in trading.

Consequently, Fibonacci’s ratios are used in trading commonly in the form of retracements, time zones, fans and arcs.

The Big Idea

Fibonacci’s sequence is used in a number of ways, the most common is in the context of retracements. When there is a big movement in the price, it eventually comes back on itself and it is thought that the retracement uses the ratios 0.236, 0.382, 0.5 and 0.618 as lines of support/resistance.

This is how you place the ratios on a graph:

Click on the button in MetaTrader below:

Fibonacci button.

Then left-click the mouse over the peak/trough of a big move in price and drag the cursor to the other end of the price movement. The result will be that a series of lines appear on the graph at the Fibonacci ratios.

There are two important areas to investigate and shall be the topic of the following pages; first, is there evidence that Fibonacci’s ratios actually exist naturally in the graphs? Second, is there evidence that Fibonacci’s ratios influence how people speculate?