Fibonacci numbers

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… etc

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!

Why this sequence is called Fibonacci? The sequence of numbers was discovered by Leonardo de Pisa, also known as Fibonacci. He lived in 12^th 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!

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 software that calculates everything for you. 

Now here is the mystery – with major ratios calculated from Fibonacci numbers forex traders can actually predict a behavior of trend and countertrend 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 ofretracement, 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 countertrends 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. Wow!!

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 Spiral

 The Fibonacci Spiral is a geometric spiral whose growth is regulated by the Fibonacci Series. Its sudden, almost exponential growth parallels the rapid growth of the series itself.

 The spiral itself is a series of connected quarter-circles drawn inside an array of squares with Fibonacci numbers for dimensions. This is illustrated below.

Fibonacci Channel

Fibonacci Channels are built using several parallel trend lines. To build this instrument, the channel having the width taken as a unit width is used. Then, parallel lines are drawn at the values equal to the Fibonacci Numbers, beginning with 0.618-fold size of the channel, then 1.000-fold, 1.618-fold, 2.618-fold, 4.236-fold, etc. As soon as the fifth wave finishes, correction in the direction opposite to the trend can be expected.

It is necessary to remember for a correct Fibonacci Channel building: base line limits the upper part of the channel when trend is ascending, and the lower part of it when trend is descending.

Fibonacci Time Zones

Fibonacci Time Zones are a series of vertical lines. They are spaced at the Fibonacci intervals of 1, 2, 3, 5, 8, 13, 21, 34, etc. The interpretation of Fibonacci Time Zones involves looking for significant changes in price near the vertical lines. In the following example, Fibonacci Time Zones were drawn on the Dow Jones Industrials beginning at the market bottom in 1970.

You can see that significant changes in the Industrials occurred on or near the Time Zone lines.

Fibonacci Time Goal Analysis

For construction of this tool, the user sets position of two extreme points. The Fibonacci Time Goal Analysis uses relations of 0, 618, 1,000 and 1,618 for an exact prediction of day, time and the price accordingly at which reaching the trend will change a direction.

Fibonacci Price Projection

Fibonacci Price Projections Traders often get excited when they believe they can use an indicator or tool to ‘project’ prices into the future, but in reality, price projections just give us a possible target that the market may or may not achieve.

Traders use Fibonacci Price Projections (also called “Extensions”) in a similar manner as Fibonacci Retracements, but they are looking to project where price will travel upwards to hit resistance (in an uptrend) rather than find where price will find support via retracements.

While traders often use Fibonacci ratios 38.2%, 50.0%, and 61.8% for retracements, it is quite common to use 61.8%, 100.0%, 132.8%, and 161.8% for Price Projections and Extensions.

What exactly does this mean?

To draw a Fibonacci Projection grid, we’ll need to identify a swing low, swing high, and price retracement against the swing high (for uptrends – reverse the definition for projecting price in a down-trend).  Let’s see an ideal example:

This example is done in the context of an uptrend.  We start our projection grid off a Swing Low and then draw the first line to the next Swing High.

1.  In an up-trend, Identify a Swing Low (retracement)
2.  Use your Fibonacci Projection Tool to move from the Swing Low to the next Swing High for the ‘base.’
3.  Draw the Second Line from the Swing High to a Retracement (Swing) Low

The first line (from Swing Low to Swing High) serves as the “Measurement Swing” by which we will soon create Fibonacci Projections.  The “Retracement” Swing provides the base from which to project Fibonacci relationships of the first swing.

For example, if the original swing is $10 and our retracement is $5 down, we would take the Fibonacci ratios of the $10 swing (61.8%, 100%, etc) and then add those values to the Retracement Low.  Luckily, most software programs do all this for us with three clicks – you just need to know where to point your mouse to click.

Now, unlike the Fibonacci Retracement tool where we are looking to find support, we are now looking to find points above price where the market is likely to experience Overhead Resistance.  These will now serve as Profit Targets to help us establish risk/reward relationships.

Fibonacci Retracement

The Fibonacci Retracement is probably the most heavily used Fibonacci tool in the toolset. You will find Fibonacci Retracements as a solid tool in identifying key support and resistance areas.

If prices have fallen from a recent swing high down to a swing low, the expectation is that price should retrace distance, high to low, by a ratio of the Fibonacci sequence. .

You can use Fibonacci retracements and extension from a tick chart through a daily, monthly and weekly.  Literally any time frame

It is important to note, the larger price move from swing high to swing low, the more accurate the retracement projections. Identification and selection of the correct swing points are keys to success.

While there are many variations of the ratio set, simple is better, lets focus on four major retracement levels.

• 23.6% -- The shallowest of the retracements. In very strong trending markets price typically quickly bounces in the area of this ratio.

• 38.2% --- This is the first line of defense of the current trend. Breaking this level starts to erode the underlying trend. 

• 50% -- The neutral point of any retracement. This is the critical tipping point.

• 61.8% -- retracing to this typically signals a breakdown in the trend.

• 100% -- Matching the move

In this section we will also show examples of how potential opportunities form when price retraces beyond 100% by following another set of Fibonacci ratios:

• 138.2%
• 161.8%
• 200%

Notice in each case we have simply added 100% to the standard ratio set. I use this set of retracements on a daily basis, from 23.6% all the way to 200% and sometimes 300% For my style of trading I find 38.2%, 50% and 61.8% quite reliable.I use the other primarily as confirmation levels.

So lets take a look at some examples of Fibonacci Retracements in use. 

Example 1:
Take the example below. The EUR/USD had risen from 1.3360 to 1.4278. The next day the EURUSD failed to make a new high and the potential swing point was in place. So I using swing points I placed a Fibonacci retracement on my chart.

The trend was obviously very strong and the first retracement to the 23.6% level was met with a violent change in direction. You can see the dip below the 23.6% level and the sudden reversal. While there are multiple entry methods, the most conservative would be to wait until the level is penetrated and price establishes itself above that level and enter on the open of the next bar as shown.

With the right money management, you can see in this example this could have been a serious winner.

Once you understand the method you can find countless examples. Every market, FOREX, Equities and Futures each exhibit these patterns to some degree. 

Example 2:
Lets look at another example using the USDCAD. You can see in this example there are multiple entry points for both trend and countertrend trades.

Lets zoom in and look at the area highlighted in blue. Fibonacci Ratios work on virtually any size price swing.

The chart below shows the Fibonacci Retracement applied to the smaller price swing.

The blue ellipses show the high potential entry points. Notice, in each of these cases you could have entered the market with a relatively tight stop loss with high reward potential.

Ok, we have shown some examples of well behaved price action. What happens if price retraces 100%?  How far can it go beyond this point? Fibonacci ratios provide some clues to answering this question and finding low risk entry points.

Example 3:
The example below shows the GBPUSD making a bottom and bouncing back. And multiple entry points from the same set Fibonacci  Retracement levels.

Of note are the high potential entry points at 38.2%, 50% and 61.8%. Each of these could have been entry points with solid profit potential. However, notice after the initial breakout above 100%, there were other opportunities to get in the trade. Ultimately price jumped to the 138% point before backtracking.

This example shows yet another way to use Fibonacci Retracements. This example shows why it is valuable to identify potential levels above and beyond the initial 100% retracement.

Retracements are the cornerstone of Fibonacci theory as it applies to the financial markets. Hopefully these examples have provided guidance from which to draw your own retracements and expand your trading toolset.

To recap, while there are other retracement values, my defaults Fibonacci Retracements always include:

23.6%	100%
38.2%	138.2%
50%	161.8%
61.8%	200%

You can never tell when price action it going blow well beyond the 100% level.

Fibonacci Fans

Fibonacci Fans

Having had a look at speed resistance lines in forex charts – their purpose as an indicator being to provide information on possible levels of support/resistance in a retracement following a trend and also the rate of retracement – we probably ought to check out Fibonacci fans, similar method, looking to supply a similar answer, given an initial trend….

A picture being worth a 1000 words etc. here’s the deal on a real chart.

Having found a trend line, the (here) 2 outer fan lines are drawn from the origin to intersect the perpendicular of the peak at the 2 Fibonacci retracement levels, 0.382 and 0.618, or 38.2%, 61.8% on the chart. (If you’re not up on Fibonacci calculations the background is here – Fibonacci retracement). There’s a 3rd fanline (here, black) at the secondary Fibonacci root 0.500.

The interpretation is simple – a price finds (trailing) support/resistance at the fan lines. It should/may bounce between these 2 containments for as long as the trend continues.

Naturally, the use of Fibonacci fans rest heavily on the principles of Fibonacci retracement in general – if you don’t entirely buy into this as a viable forex technique when taken out of the classroom – as I for one, do not – their use is, well, dubious… but, there’s room in this world – you’re always encouraged to think differently…

Fibonacci Arc

To build a Fibonacci Arc, the position of two extreme points must be set. This is done by drawing a trend line between the two points. This line can be drawn from the lowest cavity or gap, to the highest peak on the chart. Then three arches are created with the center arch falling at the second extreme point. The arches should be drawn at the Fibonacci levels of 38.2%, 50% and 61.8%.

A Fibonacci Arc is considered to demonstrate the potential levels for support and resistance. Generally, Fibonacci Arcs and Fans are both drawn on the chart at the same time. This allows the levels of support and resistance to be defined by the points where these lines cross. It should be understood, that the points crossing the arches from a price curve can vary depending on the scale size of the chart. But, because the arch is a part of a circle, its form is always constant.

Simply put, Fibonacci Arcs are constructed by first drawing a trend line between the two most extreme points on the chart. For example, the trend line should be drawn from the lowest gap to the highest opposing peak. Then, three arches are drawn with the second arch centered around the second extreme point.

The radius' of these arches represent the distances along the trend line in proportion to it's length and are equivalent to the Fibonacci levels of 38.2%, 50.0%, and 61.8% on the chart. By interpreting the Fibonacci Arcs, you are able to anticipate the support and resistance as prices approach the arcs.

The following chart will illustrate just how the arcs can supply information on support and resistance. The most common technique is to display both the Fibonacci Arcs and Fan lines together in order to anticipate the support and resistance at the points where the lines intersect. Remember that because the arcs are circular in relation to the chart axis, the points at which they cross the price date will vary depending on the scale size of the chart

Fibonacci Triangle

The Fibonacci Triangle

In a regular triangular lattice we draw on top a red regular unit triangle, underneath a yellow rhombus and beneath a second red triangle. Under the red triangle an other yellow rhombus and beneath a red isosceles trapezium. And now always under the red trapezium a yellow rhombus and under the yellow rhombus a red trapezium.

Fibonacci trader

Fibonacci trader - Fibonacci Trader is a work book for providing new strategies and essential timings of up and down market. It is an innovative book for saving yourself from bad market consequences. Fibonacci trader work book teach you market real consequences, also an individual and company use Fibonacci Trader for saving themselves from mismatch market or loosing capital.

Fibonacci stocks

Fibonacci stocks - Fibonacci stocks help the stocks marketer to retrace the latest information about the stock market. Hence the Fibonacci stocks are the Stocks by which a stock marketer can predict and retrace the stocks is called the Fibonacci stocks. In this stock Fibonacci series is used for tracing the stock market information. Now in the other word Fibonacci stocks are the stocks are the stocks in which Fibonacci numbers are used for retracing the latest information of the stock market

Fibonacci software

Fibonacci software - The Fibonacci software is a computational instrument used exclusively by people that apply Fibonacci ratios for predicting price and time. It cannot be obtained or availed otherwise. The software is most compatible with ASCII data files of the format DATE TIME OPEN HIGH LOW CLOSE VOLUME, or Metastock ASCII files in the format TICKER, PER, YYYYMMDD, TIME, OPEN, HIGH, LOW, CLOSE. .prn extensions are majorly employed for this software's functioning.

Fibonacci quotes

Fibonacci quotes - Fibonacci quotes are derived applications of Fibonacci mathematical theories. One of them questions about the number of rabbits that can be bred from a single pair in a year. Differentiating into specifics, the quote says that a man owns a pair of rabbits enclosed inside a walled structure. They can breed every month a pair and start breeding in the second month after their month.

Fibonacci Golden Rule

Fibonacci Golden Rule - The golden ratio has been a subject of extensive study for mathematicians and naturalists, and is accurately affiliated with the Fibonacci sequence. As the definition goes, Fibonacci sequence is the result of an explicit addition of its two preceding terms. Golden ratio, on the contrary, being derived from the formula: Fn=((Phin-(1-Phi)n)/Sqrt[5]; is the limit of the proportions obtained by dividing the preceding two terms. As the Fibonacci sequence progress rightwards, the ratio of the preceding two terms inches amazingly near to the golden ratio.

Fibonacci functions

Fibonacci functions - Fibonacci functions are represented as Fn = Fn-1 + Fn-2; where F denotes a function followed by a subscripted symbolization of its iteration. They can be alternately elucidated as 'a generalized form of Fibonacci numbers'. However, for reporting the magnitude for the nth term, adding the numbers iteratively may produce an uphill task (especially in cases where n is very large). Therefore, a special function has been devised to resolve this impediment, given by: an = [ Phin - (phi)n]/Sqrt[5]; where Phi = (1+Sqrt[5])/2.

Fibonacci Extensions

Fibonacci Extensions - Fibonacci extensions are furthered developments in Fibonacci fundamentals. These have been extensively tapped by traders and investors in deducing out future support and resistance levels of a particular trend. These levels are plied beyond the standardized 100% level, offering traders to seek areas that yield optimum profits and benefits. 161.8%, 261.8% and 423.6% are perhaps the most well known extension levels in this context.

Fibonacci equation

Fibonacci Equations - Fibonacci equations, by definition, are mathematical applications wherein every term of the equation is the sum of its preceding two numbers. The execution of this process, also a property of recursion, is accomplished by initiating the values of the first an second terms as 0 and 1 respectively. The remaining values can be 'recursively' quantified henceforth. Therefore, the calculated sequence processes as 0, 1, 1, 2, 3, 5, 8, 13, 21, 34 and so on.

Forex Technical Analysis

This article provides insight into one of the two major methods of analysis used to forecast the behavior of the Forex market. Technical analysis and fundamental analysis differ greatly, but both can be useful forecast tools for the Forex trader. They have the same goal - to predict a price or movement. The technical analyst studies the effect while the fundamentalist studies the cause of market movement. Many successful traders combine a mixture of both approaches for superior results.

Technical analysis

Technical analysis is a method of predicting price movements and future market trends by studying charts of past market action. Technical analysis is concerned with what has actually happened in the market, rather than what should happen and takes into account the price of instruments and the volume of trading, and creates charts from that data to use as the primary tool. One major advantage of technical analysis is that experienced analysts can follow many markets and market instruments simultaneously.

Technical analysis is built on three essential principles:

1. Market action discounts everything! This means that the actual price is a reflection of everything that is known to the market that could affect it, for example, supply and demand, political factors and market sentiment. However, the pure technical analyst is only concerned with price movements, not with the reasons for any changes.
2. Prices move in trends. Technical analysis is used to identify patterns of market behavior that have long been recognized as significant. For many given patterns there is a high probability that they will produce the expected results. Also, there are recognized patterns that repeat themselves on a consistent basis.
3. History repeats itself. Forex chart patterns have been recognized and categorized for over 100 years and the manner in which many patterns are repeated leads to the conclusion that human psychology changes little over time.

Forex charts are based on market action involving price. There are five categories in Forex technical analysis theory:

• Indicators (oscillators, e.g.: Relative Strength Index (RSI)
• Number theory (Fibonacci numbers, Gann numbers)
• Fibonacci Studies
• Gann Tools
• Channels
• Waves (Elliott wave theory)
• Gaps (high-low, open-closing)
• Trends (following moving average).