FOREX TRADING

Fibonacci, Actually named Leonardo of Pisa, was born in Pisa, Italy about 1175 A.D.. Today, he is recognized as the greatest European mathematian of the middle ages. Fibonacci is credited with introducing the Arabic-Hindu numeral system to Europe. He also introduced the decimal system. Both became the basis of mathematics we use today. Enough background for now.

Although Fibonacci covered an entire realm of mathematics, the main numbers used in trading are actually percentages. The percentages are 38.2%, 50%, and 61.8%. These areas are viewed as trend retracement points. The most commonly held theory is that a 38.2% retracement of a trend is a failed reversal and the overall trend should continue. A retracement to the 61.8% mark signals that the retracement is the beginning of a new trend. The 50% level is used for different strategies if confirmed by several other signals

The use of Fibonacci numbers in trading has become increasingly popular in recent years. It does not take long when looking at charts to see several examples of Fibonacci tracements. On numerous occassions I have watched analysts making market predictions on T.V. shows. I will often check the charts about what they discussed. Some of the predictions for new price levels are dead on Fib. retracement numbers.

Fibonacci numbers, as with all technical indicators should not be used by themselves. They should be combined with other indicators to make a complete system to trade with. I do believe that Fibonacci numbers should be a part every traders list of indicators. They do seem to be extremely accurate, This could possibly a self fulfilling prophecy. If enough people believe it, they will cause it to hold true.

In any case, if you do not currently use them, you may want to look into it.

Leonardo Pisano, better known by his nickname Fibonacci, published Liber abaci in 1202 in which he posed the following problem:

A certain man puts a pair of rabbits in a place surrounded on all sides by a wall. How many pairs of rabbits can be produced from that pair in a year if it is supposed that every month each pair begets a new pair, which from the second month on becomes productive?

The resulting sequence is 1, 1, 2, 3, 5, 8, 13, 21, 34, 55,… each number in the series is the sum of the two numbers preceding it. He also discovered that each number in the sequence is 1.618 times the preceding number and.618 of the next number.

Many technicians use the Fibonacci numbers when trying to determine support and resistance, and commonly use.382,.50, and.618 retracements.

(more…)