The Fibonacci series is named after its inventor, Leonardo de Pisa de Fibonacci, who was born in Italy in 1170. On his extensive travels, he was introduced to the nine digit system that was used by the Indians (1,2,3,4,5,6,7,8,9) Later, the digit 0 was introduced, making it a 10 digit system.
Fibonacci’s claim to fame was the discovery that in a numerical sequence, the sum of the previous two numbers will always equal the next number in the sequence. For example:
1+1 = 2
1+2 = 3
2+3 = 5
5+8 = 13
8+13= 21
13+21 = 34 To infinity
The same sort of numerical sequence was observed in nature; pineapples grow in a numerical sequence (8 parallel rows spiralling gradually, 13 parallel rows spiralling at a medium slope, 21 parallel rows spiralling steeply.) Sunflowers also grow in a numerical sequence (55 parallel rows of seeds spiralling counter-clockwise, 89 parallel rows of seeds spiralling clockwise)
What does all of this have to do with FOREX trading? There are two ratios that need to be explained: the retracement ratio and the extension ratio.
| Retracement Numbers | Extension Numbers |
|---|---|
| 0.382 | 1.618 |
| 0.50 | 1.27 |
| 0.618 | |
| 0.786 |
In an uptrend, the market is making higher highs and higher lows; in a downtrend, it is making lower lows and lower highs. The wave movements in both an uptrend and a downtrend move in an A,B,C,D. In an uptrend, the low is considered an A. After the move comes to an end, that high is considered a B. As the market retraces, the end of the retracement low is considered C and the new rally, which rises above B and tops out, is considered D. The Fibonacci retracement levels act as future hidden levels of support.
An Example of a Fibonacci Chart:
The natural law of the Fibonacci numerical sequence works on every time frame and in every market. It works on stock and commodity markets as well as the FOREX market. Many trading software programs include Fibonnaci charts and you can include it as part of your trading strategy. Like any charting system, it takes time to learn and understand, but it can become a valuable tool for success.