Technical Indicators

If you’re beginning to dabble in trading, it won’t be well before you commence hearing about Fibonacci trading, Fibonacci numbers, Fibonacci retracement, and so on. Every discipline features its own jargon, but this appears as if it’s something more than merely a special name for something. Heaps more, in fact, which appears to be rather complex. All the same, before you run screaming from the room, let’s have a look at what a Fibonacci sequence is. Now and again when you break things down and view them a bit at a time, they’re a lot less frightening.

Named after the Italian mathematician who first set out the idea in the thirteenth century, the Fibonacci sequence begins with the numbers 0 and 1 as the first two numbers in a list. The next number, and each one that comes after, is the sum of these two numbers that came directly before it. So the next number in this sequence would be 1 (the amount of 0 and 1). The number after it would be 2 (the sum of 1 and 1), then 3 (2+1), 5 (3+2), and so on. So the beginning of the Fibonacci sequence would look like this: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, and on into infinity.

Creating a number sequence like that is fascinating enough in itself, particularly for math geeks. But the numbers have other sorts of relationships to one another that make this sequence downright intriguing. Each number in the series is about 1.618 times larger than the number that came before it. And you get certain common ratios each time that you divide one number in the sequence by another one that stands in a particular relationship to it. As a matter of fact, the’re three of these ratios that seem to be important in the stock market world.

The first ratio comes when you divide a number in the succession by the number that comes directly after it. So if you divide 8 by 13, or 8/13, you get 0.6153. Divide 55 by 89, or 55/89, and it’s 0.6179. Rounding the results, it seems that doing this kind of division will hover at a ratio of 61.8%. People who study the Fibonacci sequence call this the “golden ratio”

For the second important ratio, a number is divided by the number that comes two places after it, rather than one. So for instance, dividing 55 by 144, or 55/144, would give you a 38.2% ratio. And the third ratio is discovered by dividing a number by the number that comes three places after. So 8 divided by 34, or 8/34, provides you with 0.2352, or when averaged with other similar divisions, a ratio of 23.6%.

You may wonder what any of this has to do with stock and forex trading. Firstly, these ratios seem to play a role in how things happen in nature. As an example, the number of petals on nearly all flowers is a Fibonacci number. Many architects use the golden ratio in the design of their buildings. And for some reason, the Fibonacci numbers and their ratios also seem to play a role in how the market exchange behaves.

If prices are trending in a certain way and there is some sort of reversal, they usually retrace their steps backwards to a point somewhere between where they originally started, and the highest (or lowest) point they had reached country before reversing. The point where they stop retracing, and head back upward (or downward), is usually at a place that can be identified with one of the ratios related to the Fibonacci sequence. So if a price started at zero and had reached country 100 before reversing, it would stop somewhere around 23.6, 38.2, or 61.8, and commence upward again. There are a number of other ratios that in addition have a sway for different reasons, but the Fibonacci ratios are extremely important.

Not everybody is quite sure why this is the truth, but this fact does seem to correspond with the fact that the Fibonacci numbers seem active in the world in the main. These ratios might be why so many people consider the stock exchange almost an inevitable, nature-driven process in itself, and view it as having something nearly like divine status. Whatever the grounds for this fascinating connection, it signifies that if you would like to play the stock exchange in an important way, you pretty much have no choice. You’re going to need to learn something about the Fibonacci numbers, and how they relate to trading.

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