Fibonacci Analysis

Using Fibonacci is much easier than most people once thought, and it can help you set up your currency trades more effectively than other types of analysis.

Fibonacci is the basis of many trading methodologies, and many billions of dollars are traded every year based on Fibonacci techniques alone.
There is a deep-rooted history associated with the basic principles of Fibonacci - named for the mathematician Leonardo Pisan Fibonacci – but we will instead focus on a series introductory articles about how you can use his series of numbers for analyzing the markets.

Let’s do cover a bit of ground before we can get to the charts. Fibonacci is best remembered for his Fibonacci sequence, which is the series of numbers where each number is the sum of the two preceding numbers. 1, 1, 2, 3, 5, 8, 13, 21, 34, 55…

As traders, we are most interested in the ratio between these numbers – called the Fibonacci ratios. By comparing the relationship between each number, and each alternate number, and even each number to the one four places to the right, we derive some fairly consistent ratios.

The most important rations for trading are: .236, .50,.382, .618, .764, 1.382, 1.618, 2.618, 4.236, and for good measure we include 1.00…. This can start to look complicated, but it really isn’t. It turns out that the ratios are mathematical principles prevalent in nature all around us. What’s more is that these rations are even prevalent in man-made objects.

There are many interesting, entertaining, and poetic observations about Fibonacci numbers and ratios in the universe. Fibonacci numbers and ratios appear in ancient buildings, in plants, planets, molecules, the dimensions of human bodies, and of course rabbit populations. But of what use is all that to the intrepid trader? Traders usually study charts! Fibonacci ratios may be applied to the price scales and also to the time scales of charts. Many traders and analysts will apply Fibonacci analysis to the price scale.

Since prices never move in a straight line, you will easily see the ebb and flow of a currency on chart. More importantly, you can see how currency prices advance and retrace, and this is the key to using Fibonacci. All currencies that are liquid will often retrace and advance in Fibonacci proportions, but not always.

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