4.16 Introduction to the Fibonacci Sequence

 

Fibonacci sequence of numbers.

OK, let’s get mystic here. While we’re pretending to study Forex we’ll branch off just a bit into Sanskrit, Indian mathematicians, Italian mathematicians and exotic number sequences that have everything to do with rabbits breeding, branching of trees and a pine cone.

 

Uh..oh…he’s flipped it, you groan!

 

Sorry to disappoint you, but actually the Fibonacci sequence is a string of numbers that first appeared in Indian mathematics and Sanskrit literature. Later it was introduced to the West by Italian math whiz, Leonardo Fibonacci. 

 

Actually Mr. Fib used the number sequence to arrive at the answer to this problem: If you put a male and female rabbit in a closed field, and let them do what rabbits are best at (ahem!), how many pairs of rabbits would you have at the end of a year, assuming each pair produced another pair of male-female rabbits after a month and none died?

0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144……….!

 

Fibonacci sequence is a series of numbers in which each number is the sum of the previous two numbers. The first two numbers of Fibonacci series are 0 and 1 or the typical binary numbers. Let's start with these two numbers and check how the series develops:

 

  • First two numbers: 0, 1.
  • Third number = 0+1 = 1.
  • The extended series = 0, 1, 1.
  • Fourth number = 1 + 1 = 2.
  • The extended series = 0, 1, 1, 2.
  • Fifth number = 1 + 2 = 3.
  • The extended series = 0, 1, 1, 2, 3.

 

If we continue adding the latest two numbers to get the next number, we get a series of numbers as follows:

 

0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233 and so on.

 

Mr. Fib also discovered that this series created ratios that described the natural proportions of things in the universe such as the branching of trees, leaves on a stem, and the arrangement of a pine cone. These were called ‘golden ratios’ and went like this: 

 

Measuring the ratio of any number in the sequence to the next higher number, you would get 0.618. (E.g. 55/89 = 0.618)

 

Measuring the ratio between alternate numbers you would get 0.382. (E.g. 21/55 = 0.382)

 

So? What has all this geek-speak got to do with making money in the forex market, you yawn.  Here’s the magic – while these numbers and ratios apply to most things in the universe, they also work in our markets by creating levels of support and resistance!  That should make you sit up. Got your attention now, haven’t I?

 

We’ll give you a break now and let you chew all this over, but want you to learn this stuff before you head for the beer:

 

Fibonacci Retracement Levels

0.236 i.e. 23.6%, 0.382 i.e. 38.2%, 0.500 i.e. 50%, 0.618 i.e. 61.8%, 0.764 i.e. 76.4%

 

Fibonacci Extension Levels

1.382 i.e. 138.2%, 1.618 i.e. 161.8%, 200% and 261.18%

 

In our Forex trading we’ll be using Fibonacci retracement levels to identify areas of support and resistance. 

 

We’ll use Fibonacci Extension levels to identify profit taking levels, i.e. places to lock in the profit pips.

 

Just so you’ll enjoy that beer, we don’t have to the math for the above numbers – most charting software and trading platforms have these levels built-in.

 

More in next!

 

 

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