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What is Fibonacci in Trading?

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Once you learned the importance of defining a trend, finding key price levels (support and resistance) and the way of trading chart patterns, it is time to go deeper.

This time we are going to talk about unique code that is not only in trading but in the whole universe around us.

The shape of the snail shell, Milky Way Galaxy, flowers and other creatures in nature has this secret code in themselves.

We are talking about Fibonacci sequences.

If you tried to find some info about Fibonacci, you would come across similar explanation by others.

They tried to bring it to you like magic, so you think there is something special in that trading tool.

That’s not the way we trade and suggest others to do.

The Fibonacci is nothing else than a charting tool and you have to use it having that in mind.

Before going deeper into the Fibonacci charting tools we suggest you consider using, let’s tell you shortly about Fibonacci and his sequence.

Leonardo Fibonacci is an Italian mathematician who was famous for discovering the Fibonacci sequence.

He didn’t discover it but just bring to Europe because the Fibonacci numbers originate back to ancient India. 

Now, what are Fibonacci numbers and the Fibonacci sequence?

The Fibonacci Sequence is the series of the Fibonacci numbers:

0, 1, 1, 2, 3, 5, 8, 13, 21, 34, …

The next number is found by adding up the two numbers before it.

  • The 1 is found by adding the two numbers before it (0+1)
  • The 2 is found by adding the two numbers before it (1+1)
  • The 3 is found by adding the two numbers before it (1+2),
  • And the 5 is (2+3),
  • and so on!

Example: the next number in the sequence above is 21+34 = 55

Here is a longer list:

0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987, 1597, 2584, 4181, 6765, 10946, 17711, 28657, 46368, 75025, 121393, 196418, 317811, …

And here is a surprise.

When we take any two successive (one after the other) Fibonacci Numbers, their ratio is very close to the Golden Ratioφ” which is approximately 1.618034…

In fact, the bigger the pair of Fibonacci Numbers, the closer the approximation.

Let us try a few:

A B   B / A
2 3   1.5
3 5   1.666666666…
5 8   1.6
8 13   1.625
144 233   1.618055556…
233 377   1.618025751…

Note: this also works when we pick two random whole numbers to begin the sequence, such as 192 and 16 (we get the sequence 192, 16, 208, 224, 432, 656, 1088, 1744, 2832, 4576, 7408, 11984, 19392, 31376, …):

A B   B / A
192 16   0.08333333…
16 208   13
208 224   1.07692308…
224 432   1.92857143…
7408 11984   1.61771058…
11984 19392   1.61815754…

Now, when you learned more about Fibonacci and his numbers, it is time to explain to you how to use them in trading and why it is actually useful.

After spotting these numbers all around us, people were fascinated by them.

They are everywhere.

The human body is a perfect example of the golden ratio.

Because of that, people tried to find these number in other areas too.

Then they came across some interesting facts in trading as well.

Some areas were important over and over again but these areas were not visible on the chart, there was not some reason for that area to act as support/resistance.

After years of analyzing, they found out that these areas are coming from hidden support and resistance made from Fibonacci numbers.

You simply do not see them on the chart, but when you calculate, you get the support in that area.

This was in the time when people were doing all by their hands.

That’s the first time people started using Fibonacci numbers in trading.

Later on, with the technology, we got automotive software that are plotting charting tools and calculating for us everything we need.

What a great time to be a trader, right?

We can just simply choose any tool we want, plot it on the chart and everything will be automatically calculated.