What are Fibonacci Numbers? Articles | Investing

By: Guy Starbuck

Who is Leonardo Fibonacci? Was he the guy who painted Mona Lisa? Or is he the guy behind the counter at Vinnie’s Pizza? He is neither. In fact, Fibonacci (1175-12150) is the name of a famous Italian mathematician who made enormous contributions to the field of mathematics including introducing the decimal system to Europe.

He is also the man behind a sequence of numbers which have since then become known as 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, and 3 + 2 = 5). The first numbers in the sequence are as follows: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, and 144...and so on till infinity.

Fibonacci discovered a strange relationship in these series of numbers, their ratios to one another and the prevalent nature around us. So what has that got to do with forex trading?

In fact quite a lot. The ratios which exist in the Fibonacci numbers are also present in the price movement of currencies – be it stock or any other form of investment.

Without sounding mysterious any more, let us take 3 big numbers which you need to remember: 0.382, 0.500, and 0.618. Though there are many other numbers, but these three happen to be most important.

The fact of the matter is that these numbers are used to derive the ‘retracement levels’ which in turn are used by brokers to assess the purchase and sell off timings. This is how it works:

Imagine that the price of a currency pair or a company’s stock is on an ascending trend. History says that prices go up, then get in to a temporary turn mode and then resume their upward trend. The reversal point is where the Fibonacci numbers play a role.

The price of a currency is going up is expected to turn and reach one of the Fibonacci numbers before it bounces back upwards again. If you can predict this with accuracy and buy just before the upward trend begins, you could rake in big profits.

Your online trading platform should be able to chart the Fibonacci numbers for you. All you have to do is to map the line from the low to the high point, the retracement levels are automatically charted out.

This concept is in reality not as simple as it is made out to be. Here are things to consider when the price hits a Fibonacci number:

You can not predict the precise retracement level the price will stoop to. If you choose .382 and the price drops to .618, you could stand to lose a lot of pips.

Likewise, if you choose the wrong high and low points your retracement level prediction can throw you completely out of gear.

Though the Fibonacci numbers may seem accurate, sometimes they simply do not work at all because of the number of variables in the forex market. It is not wise to depend on one method to predict currency price fluctuation.