Fibonacci numbers are a mathematical sequence
of numbers that are sometime called the Golden
Ratio. Many forex and commodity traders swear
by the magic of these numbers and their accuracy
in predicting price movement.
In the 12th century, when Leonardo Fibonacci,
an Italian mathematician, created his numerical
sequence there was no such thing as the financial
markets and these numbers were based on how
rabbits multiplied. What is intriguing about
the Fibonacci sequence is not the numbers
in the series but their ratios. The Golden
Ratio, roughly 1.618, appears to be prevalent
among us in nature. It is said that even the
behavior of the financial markets conforms
to this ratio.
Pertaining to Forex, these numbers help analysts
to determine specific changes in the trends
of the market. The numbers in the sequence
are 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89,
144.....
All these numbers tend to lie near the lines
of market graphs. These lines are called Fibonacci
lines. There are four major types of studies
done on Fibonacci's work -- fans, time zones,
arcs and retracements with retracements being
the most popular.
A retracement in forex is the likelihood that
a specific financial assets price will revert
to a prior move or not. The number is evaluated
based on whether it supports or rejects the
various levels and numbers before it continues
back to where it was intended.
Analysts study retracements by drawing various
trend lines between a variety of points on
a graph. After choosing two points, they divide
them by the difference in the distance by
ratios that Fibonacci has determined are 23.6%,
38.2%, 50%, 61.8% & 100%. Traders use these
numbers and the analysis from them to determine
where profits can be made in the market. Ultimately,
utilizing Fibonacci lines is a key strategy
in success in Forex.
