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Have you ever heard of Leonardo Fibonacci?
No, he didn’t paint the Mona Lisa. And he’s not
the guy behind the counter at Vinnie’s Pizza.
Fibonacci was a well-known Italian mathematician
who lived from around 1175-1250. He made great
contributions to the world of mathematics,
including introducing the decimal system to
He also studied a sequence of numbers that has
since become known as the Fibonacci Numbers, or
the Fibonacci Sequence.
The Fibonacci Sequence start with a 0 and a 1, and
each new number is the sum of the two previous
numbers (0 + 1 = 2, 1 + 2 = 3, 3 + 2 = 5).
The first numbers in the sequence are as follows:
0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144…and
so forth into infinity.
Fibonacci found that these series of numbers and their
ratios to one another were prevalent throughout nature
and can in fact be seen all around you.
Ok, ok, so what does this have to do with forex trading?
Well, quite a bit in fact. You see the ratios that are
found in the Fibonacci numbers can be seen in the price
movement of currencies (as well as stocks and other
Without boring you any further, I’ll give you the big 3
numbers that you should remember: 0.382, 0.500, and 0.618.
There are others, but these are the most significant.
These numbers are used to calculate “retracement levels”,
which are used by many traders to determine when to place
buy and sell orders. Here’s how it works:
Assume the price of a currency pair (or a company’s stock
for that matter) is trending upward. History shows us that
prices tend to hit a peak, go into a temporary reversal,
and then resume the trend. The reversal is where Fibonacci
numbers come in.
The price of a currency that is trending can be expected to
reverse back to one of the Fibonacci numbers and then bounce
back to continue the trend. If you forecast this correctly
you can buy in just before the upward trend continues and
score big profits.
The online trading platform you use should be able to chart the
Fibonacci numbers for you. You just draw a line from a low point
to a high point, and the retracement levels are automatically
mapped on the chart for you.
Of course, its not quite as simple as trading when the price hits
a Fibonacci number. There are other things to consider:
You don’t know which retracement level the price will stop at. If
you choose .382 and it drops to .618 you could lose a ton of pips.
Similarly, if you choose the wrong low/high points, the retracement
levels will be all out of whack.
And quite frankly, as accurate as they can be at times, sometimes
Fibonacci numbers just don’t work at all. There are many variables
at play in the forex market. You can’t rely solely on one method
to predict price movement.
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