Forex Trading

The concept of Fibonacci Forex trading is being used by millions of Forex traders all around the world. These numbers forecast the coming oscillation in the Forex charts. Though, at the same time, the prediction made cannot be proclaimed as flawless and straight hitting to the mark, the closeness it gets to is quite amazing. The Fibonacci levels are very elementary and fundamental concepts which need to be grasped before delving into the risky environment of Forex trading.

Who was Fibonacci?

Leonardo was born in Pisa, Italy in about 1170. His father Guglielmo was nicknamed Bonaccio ("good natured" or "simple"). Leonardo's mother, Alessandra, died when he was nine years old. Leonardo was posthumously given the nickname Fibonacci (derived from filius Bonacci, meaning son of Bonaccio).



Guglielmo directed a trading post (by some accounts he was the consultant for Pisa) in Bugia, a port east of Algiers in the Almohad dynasty's sultanate in North Africa. As a young boy, Leonardo traveled there to help him. This is where he learned about the Hindu-Arabic numeral system.

Recognizing that arithmetic with Hindu-Arabic numerals is simpler and more efficient than with Roman numerals, Fibonacci traveled throughout the Mediterranean world to study under the leading Arab mathematicians of the time. Leonardo returned from his travels around 1200. In 1202, at age 32, he published what he had learned in Liber Abaci (Book of Abacus or Book of Calculation), and thereby introduced Hindu-Arabic numerals to Europe.

In the Liber Abaci, Fibonacci introduces the so-called modus Indorum (method of the Indians), today known as Arabic numerals. The book advocated numeration with the digits 0–9 and place value. The book showed the practical importance of the new numeral system, using lattice multiplication and Egyptian fractions, by applying it to commercial bookkeeping, conversion of weights and measures, the calculation of interest, money-changing, and other applications. The book was well received throughout educated Europe and had a profound impact on European thought.

Liber Abaci also posed, and solved, a problem involving the growth of a hypothetical population of rabbits based on idealized assumptions. The solution, generation by generation, was a sequence of numbers later known as Fibonacci numbers. The number sequence was known to Indian mathematicians as early as the 6th century, but it was Fibonacci's Liber Abaci that introduced it to the West.

Contribution of Fibonacci in the number theory is one of the most important incorporations in the domain of arithmetic and calculations. He conferred the following benefits:
- Implementation of square root notation.
- Introduction of bars in the fractions. Earlier, the numerator used to have quotations around it.

Later it was discovered that the Fibonacci numbers and the respective series were not only limited to the arithmetic but it also played a pivotal role in economics, commerce and trading sectors too.

Fibonacci Sequence

In the Fibonacci sequence of numbers, each number is the sum of the previous two numbers, starting with 0 and 1. Thus the sequence begins 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610 etc. The higher up in the sequence, the closer two consecutive "Fibonacci numbers" of the sequence divided by each other will approach the golden ratio (approximately 1 : 1.618 or 0.618 : 1). In mathematical terms, the sequence Fn of Fibonacci numbers is defined by the recurrence relation Fn=Fn-1 + Fn-2 with seed values F0=0 and F1=1.



The Golden ratio

Later, more calculations were made and it became evident that the sequence also follows a certain fixed ration. For example, when the particular number was in ratio with its just next higher number in the sequence, the value came out to be 0.618 while on the other hand, if the number was in ratio with the previous lower number, the ratio came out to be 1.618. Eventually, these two ratio values were known as the Golden mean or the Golden ratio. It was also later realized that the application of the Golden ratio and the Fibonacci numbers in the technical analysis was very beneficial as it also reflected the human behavior and human nature. This is because the Fibonacci numbers and the golden ratio are applicable to everything from architecture to human body, music, biology and art. Most of the Forex traders who have been adopting this technique feel that the entire concept is applicable because trading is related to both science and art. They believe that after a lot of meticulous and close scrutiny of the Forex market, it becomes clear that both the price movements and patterns of human behavior are interlinked and the Fibonacci technique have relations to both the patterns.

Risk and greed tolerance are applicable to the Forex trade and guide the outputs of the trade. Most of the traders, whether long term or short term undergo the risking and greed tolerance levels. In this case, if an average it calculated, it becomes evident that what the current perspectives of the traders are. In the same manner, the Fibonacci sequence reveals through the cost of the pricing instruments that how many traders have reached or are reaching the tolerance levels.
With the application of the Fibonacci techniques, it also becomes easier to predict the various turning points which would crop up in the Forex trading.

How can we use the Fibonacci numbers in Forex trading?

Technical analysis is one of the most pivotal tools for forecasting the different twists and turns of the Forex market. Resistance and support levels in the bar charts of the Forex trading are the most important components which have to be scrutinized through the technical analysis. These levels are very important to know regarding the entry and exit spots of the Forex market. For this respective utility, the Forex traders are also using the "retracement" levels involving the Fibonacci percentages. 38.2% and 62.8% are the two most important retracement levels in the Fibonacci percentages.

By using the Fibonacci numbers in the charts, you can find more supports and resistances. It will be a big help to choose the right direction and avoid entering to a wrong trade. To use the Fibonacci numbers in the charts, you have to find the top and the bottom of the previous trend. When the previous trend has been a downtrend, you draw the Fibonacci levels from top to the bottom and extend the lines in the way that they cover the next completing trend and when the previous trend has been an uptrend, you draw the Fibonacci levels from the bottom to the top and extend the lines in the way that they cover the next completing trend.

You have to wait for the trend to become completed: You cannot draw the Fibonacci levels while the trend is not completed. When you cannot find a completed trend in a time frame, you have to look for one in the smaller or bigger time frames in the same currency pair or stock.

The Fibonacci Method is one of the most essential aspects of Forex trading. It basically includes indicators, charting and instrumental spotting patterns. The main strategies which are employed under the utility for the funds traded through exchanges, stock indices and different stocks indicated in the returns.
Furthermore, the Elliot Wave concept is used, which includes the classic applications and principles. The main idea behind using the Fibonacci numbers is to predict as a potential tool in the trading system is to predict and calculate the important and pivotal points in the Forex markets which might be indispensable in causing sudden twists and turns, analyze the business growths and other economical recycles which might occur. At the same time, these Fibonacci methods are also pivotal in predicting the profitable and benefiting aspects of the interest rate and their movements.

Fibonacci Retracement - Zero percent is the considered as the peak of the crest of the move while hundred percent is considered as the bottom most point of the trough of the move. The trading signals are revealed by the Fibonacci retracement zones or levels which are calculated at 23.6%, 38.2% and 50%. Since it's mostly seen that history is continuously repeated when it comes to the Forex market, the Fibonacci methods prove be to be very applicable over here. Thus, with these shapes, the Forex traders are not only able to predict the entire course of the market, they also end up preventing worthless investments.

Fibonacci Equations - Fibonacci equations, by definition, are mathematical applications wherein every term of the equation is the sum of its preceding two numbers. The execution of this process, also a property of recursion, is accomplished by initiating the values of the first and second terms as 0 and 1 respectively. The remaining values can be 'recursively' quantified henceforth. Therefore, the calculated sequence processes as 0, 1, 1, 2, 3, 5, 8, 13, 21, 34 and so on.

Fibonacci Extensions - Fibonacci extensions are furthered developments in Fibonacci fundamentals. These have been extensively tapped by traders and investors in deducing out future support and resistance levels of a particular trend. These levels are plied beyond the standardized 100% level, offering traders to seek areas that yield optimum profits and benefits. 161.8%, 261.8% and 423.6% are perhaps the most well known extension levels in this context.

Conclusion

The only thing we know is that Fibonacci numbers work in everything from the microscopic materials like DNA molecule to the distance between our eyes, ears, hands, even the distance of the planets in the solar system and the way they move in the space, even the distance and pathway of the stars in the universe and finally in the currencies’ prices and the way they move up and down. Fibonacci numbers can be found anywhere in the world.



As you see the effect that they have on the market is not negligible and in fact is highly considerable. I know this question is formed in your mind that why they have such a big effect on the market. Why the prices become stopped sometimes for several days below or above the Fibonacci levels? (Of course if you use the Fibonacci levels in the bigger time frames like weekly and monthly charts, you will see that sometimes the price becomes stopped by one of the Fibonacci levels for several weeks.) The answer of this question has no effect on our trading. Whether you know the reason or not, you can use the Fibonacci levels in your trades.