Fibonacci numbers … Doesn’t that sound a lot like an enormous chapter in high school mathematics’ book? If that’s what you think then you are absolutely right. We are indeed talking about those kinds of numbers. Fibonacci numbers are a sequence of numbers formed as follows:
0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55… and so on.
The sequence begins with 0 and 1. Then keep adding the last two numbers to get the next. Meaning that
0+1=1
1+1=2
1+2=3
2+3=5
3+5=8
5+8=13
well, you have got the picture now!
Here are some more examples of patterns that develop by taking numbers in the Fibonacci sequence and dividing them in a pattern with other numbers within the sequence.
| DIVIDE BY 2ND FOLLOWING | DIVIDE BY 2ND PRECEDING | DIVIDE BY 3RD FOLLOWING | DIVIDE BY 3RD PRECEDING |
|---|---|---|---|
| 0 ÷ 1 = 0 | 1 ÷ 0 = 0 | 0 ÷ 2 = 0 | 2 ÷ 0 = 0 |
| 1 ÷ 2 = 0.5 | 2 ÷ 1 = 2 | 1 ÷ 3 = 0.33 | 3 ÷ 1 = 3 |
| 1 ÷ 3 = 0.33 | 3 ÷ 1 = 3 | 1 ÷ 5 = 0.2 | 5 ÷ 1 = 5 |
| 2 ÷ 5 = 0.4 | 5 ÷ 2 = 2.5 | 2 ÷ 8 = 0.25 | 8 ÷ 2 = 4 |
| 3 ÷ 8 = 0.375 | 8 ÷ 3 = 2.67 | 3 ÷ 13 = 0.231 | 13 ÷ 3 = 4.33 |
| 5 ÷ 13 = 0.385 | 13 ÷ 5 = 2.6 | 5 ÷ 21 = 0.238 | 21 ÷ 5 = 4.2 |
| 8 ÷ 21 = 0.381 | 21 ÷ 8 = 2.625 | 8 ÷ 34 = 0.235 | 34 ÷ 8 = 4.25 |
| 13 ÷ 34 = 0.382 | 34 ÷ 13 = 2.615 | 13 ÷ 55 = 0.236 | 55 ÷ 13 = 4.231 |
| 21 ÷ 55 = 0.382 | 55 ÷ 21 = 2.619 | 21 ÷ 89 = 0.236 | 89 ÷ 21 = 4.231 |
| 34 ÷ 89 = 0.382 | 89 ÷ 34 = 2.618 | 34 ÷ 144 = 0.236 | 144 ÷ 34 = 4.235 |
| 55 ÷ 144 = 0.382 | 144 ÷ 55 = 2.618 | 55 ÷ 233 = 0.236 | 233 ÷ 55 = 4.236 |
| 89 ÷ 233 = 0.382 | 233 ÷ 89 = 2.618 | 89 ÷ 377 = 0.236 | 377 ÷ 89 = 4.236 |
| 144 ÷ 377 = 0.382 | 377 ÷ 144 = 2.618 | 144 ÷ 610 = 0.236 | 610 ÷ 144 = 4.236 |
Why this sequence is called Fibonacci? The sequence of numbers was discovered by Leonardo de Pisa, also known as Fibonacci. He lived in 12th century and was lucky enough to be the one to discover this amazing mathematical sequence. Off the topic Fibonacci numbers can be found EVERYWHERE! Scary enough these numbers represent the natural proportions of things in our enormous universe. And since forex is a part of the universe – Fibonacci numbers are applied here as well in search of a simple proportional solution for trading profits!
Trade Preparation
Start your trade preparation analysis by placing a single grid across the largest trend on the daily chart, identifying key turning points. Next, add grids at shorter and shorter time intervals, looking for convergence between key harmonic levels. Similar to trendlines and moving averages, the power of these levels tracks relative time frame, with grids on longer term trends setting up stronger support or resistance than grids on shorter term trends.
Many forex traders focus on day trading, and Fibonacci levels work in this venue because daily, and weekly trends tend to subdivide naturally into smaller and smaller proportional waves. Access these hidden numbers by stretching grids across trends on 15-minute and 60-minute charts but add daily levels first because they’ll dictate major turning points during forex’s 24-hour trading day.
Having a hard time figuring out where to place starting and ending points for Fibonacci grids? Stretching the grid across a major high and low works well in most cases but many traders take a different approach, using the first lower high after a major high or first higher low after a major low. This approach tracks the Elliott Wave Theory, focusing attention on the second primary wave of a trend, which is often the longest and most dynamic.
Speaking of trading, lets get to the main issue here – forex. You don’t have to learn how to calculate any of this by yourself. The forex broker of your choice will provide you with Fibonacci software that calculates everything for you. If your broker doesn’t give you this tool, you must consider reviewing other options and switching to another one.
Now here is the mystery – with major ratios calculated from Fibonacci numbers forex traders can actually predict a behavior of trend and counter trend movements in forex market. Spooky!!!
Here is a set of numbers to remember: 38%, 50% and 62%
If you take these percentages and apply them to the trending price you will notice not only a certain amount of retracement, but also where new high and low could go. These marks are very important to forex traders since they are support and resistance areas where the price will either hesitate for a while or will reverse.
Before grabbing the charts there is one more thing you have to know. The primary trends move all together in 5 waves. First there are 3 forward waves, and then there are 2 backward waves. Now counter trends move differently – 3 waves at a time. First there are 2 forward waves, followed by 1 backward wave.
Now you are officially eligible to get some charts to “play” with and test your knowledge. Once you figure out how to place the marks correctly (every trading platform is different), you will definitely notice Fibonacci ratios in the price movements as it changes the position from support to resistance and back to support. Then you will realize that looking at certain time frames the trends tend to have similar proportionality. Now that’s what I call forex mystery!
Whether on a hourly or a daily chart the Fibonacci lines that you draw are relevant until the price action has either confirmed or rejected them. Lets say if the price retraces to 38% line and then suddenly reverses again back to its original path crossing over the 0% line then you can for sure say that the cycle is over.
Fibonacci numbers and new trend targets
The Fibonacci numbers are very helpful not only in determining correction levels. The Fibonacci grid allows traders to precisely determine new targets that the price can reach when a trend moves impulsively.
One of the generally accepted rules is that if the price correction was 38.2% or less, its target should be set at 261.8% or even 423.6% of the correction. If there is a strong correction on the market, then the target should be set at 161.8% of its value.
The Fibonacci numbers are one of the most powerful tools of technical analysis in the Forex market. The use of the Fibonacci numbers in combinations with analytical tools to determine the limits of corrections and targets are very helpful for trading on Forex.
Summary
The bottom line, if you add the Fibonacci tool to your trading strategy, trading will be much easier for you. Simply put, all you need to do is to learn how to draw support and resistance horizontal lines and apply Fibonacci retracement levels on your charts.
But don’t worry. In this course, we are going to cover everything you need to know about Fibonacci retracement levels. We’ll show you how to draw Fibonacci retracement lines on a price chart on your trading platform and explain in detail how to use Fibonacci trading tools with other technical indicators like trend lines, support and resistance levels, and various candlestick patterns.
