ForexGen Trading - What Are Fibonacci Numbers?

Do you know who Leonardo Fibonacci is? Now, when you think of the name “Leonardo,” perhaps you think

of Leonardo da Vinci, but unlike Leonardo da Vinci, Leonardo Fibonacci did not paint the Mona Lisa.

No, Leonardo Fibonacci was a mathematician who lived from about 1175 to 1250. He was well known in

his day and contributed greatly to the world of mathematics. One of the things he did was that he

introduced the decimal system to Europe.

He also studied a sequence of numbers that are known today as the “Fibonacci numbers.” Alternatively,

they are known as the “Fibonacci sequence.”

The Fibonacci sequence begins with a zero and one. Each new number is the sum of the two previous

numbers; for instance, zero plus one equals two, one plus two equals three, two plus three equals

five, and so on.

Therefore, the first numbers in the sequence appear as follows: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55,

89, 144, ad infinitum.

Fibonacci discovered that this series of numbers and their ratios to each other occurred throughout

nature and in fact are incredibly commonplace in the world.

So what does this have to do with forex trading? Well, the ratios that the Fibonacci numbers

displayed are also apparent in the price movement of currencies, as well as in stocks and other types

of investments.

Although it’’s too detailed to go into here, there are three numbers you need to concentrate on from

this sequence. They are 0.382, 0.500, and 0.618. There are others as well, but these are the most

important.

These numbers help to calculate what are called “retracement levels.” Many traders use retracement

levels when they need to figure out where they should place buy and sell orders. It works like this:

Let’’s assume that the price of a currency pair, or a company stock, is trending upward. The history

says that prices tend to hit a peak and then go into temporary reversal. Then, they continue to trend

upward. This is where Fibonacci numbers come into play.

When a currency is trending, the price can be expected to reverse back to one of the Fibonacci

numbers. Then, it “bounces” back to its original level or nearly so to continue the trend. Assuming

you forecast this right, you can buy just before the upward trend continues and profit handsomely.

Whatever the online trading platform you use, it should give you the means to chart the Fibonacci

numbers. To do this, you draw a line from a low point to a high point. Retrace the levels will

automatically be mapped on the chart for you.

There are the things to consider besides trading when the price hits a particular Fibonacci number.

For instance, you don”t know at what retracement level the price will stop. If you choose 0.382 and

it drops to 0.618, you could lose a great deal. Additionally, if you choose the wrong high or low

point, the retracement levels will not reflect what actually happens and will be of no use to you.

Finally, even though Fibonacci numbers are a good tool, sometimes they don”t forecast accurately at

all. Again, remember that many variables come into play in the forex market. Therefore, don”t rely

just on one method, like Fibonacci numbers, to predict what price movement is going to be.