Trading With Fibonacci Numbers

Forex traders often use Fibonacci numbers and sequences to help them determine trading targets. These technical levels are relied upon by some traders without question.

Fibonacci numbers are a sequence in which each number is the sum of the two numbers that precede it. For example: 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144... etc.

This sequence moves toward a ratio of 1.618. This sequence is often referred to as the golden section, golden average or golden ratio. It is believed that humans subconsciously seek out the golden ratio and there are some that believe this sequence and the ratios derived by dividing any number in the series by the number which follows it in the sequence are part of the natural order of the universe.

The truth is this system of numbers was originally used to calculate the procreation rate of rabbits!

There are five basic trading tools
based on Fibonacci's discovery

The Fibonacci sequence of numbers is used to produce arcs, fans, retracements, extensions and time zones. The lines created by these studies are believed to signal changes as the prices reach them. Most of the software provided to traders now incorporates all or most of these studies.

Consult your software for the specifics of your system, but generally they all produce lines and arcs which are believed to represent likely support and resistance levels for prices.

Used by a large number of traders, the Fibo numbers themselves may become a major factor in influencing the market. Most of the time, the Fibonacci studies work because of the huge number of traders following them and artificially creating support and resistance levels.

The market is complex and the true nature of Fibonacci studies may just be as a self-fulfilling prophecy. Understanding this will help you use Fibonacci more efficiently. You will likely find that a Fibonacci sequence will most often work when there are no other "real" market driving forces present.

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