Fibonacci forex trading is one of the most used mathematical tools used by forex traders and the background for most trend line and support line calculations. This famous sequence of numbers literally brings in billions of dollars for traders every year. Some of you may have heard about Fibonacci numbers briefly in high school or university, but your teacher most likely didn’t tell you that these numbers could end up making you lots of money. Chances are, if your teacher had known, he or she wouldn’t be stuck teaching anymore!
Fibonacci numbers are named after the famous Italian mathematician by the last name of Fibonacci. Fibonacci discovered that there was a sequence of numbers that seemed to be favored and included in everything in nature. You may have heard of the Golden Ratio in art. This ratio of a rectangle has been used by artists for thousands of years because it is aesthetically pleasing to humans. The thing is, not only is the Golden Ratio prevalent in nature as well, it’s also directly linked to the Fibonacci number sequence.
Let’s look at what makes up the Fibonacci sequence. Start by taking the number 1 then add the number with itself, 1+1=2. Then add the resulting number with the number before it: 1+2=3, 2+3=5,5+3=8 which gives the sequence: 1,1,2,3,5,8,13,21,44,65 and so on. This ratio of numbers can be drawn as a set of squares which if added together make up the Golden Ratio. However interesting this may be it’s not what we will use Fibonacci numbers for.
Instead, consider that the ratio of a number divided by the number next to it in the sequence is always either .382 or .618 depending on if you go left or right in the sequence. Fibonacci number ratios are used in forex trading very often to predict trend lines and support and resistance levels. Why is this? Nature and man seems to favor these ratios on an unconscious level, so whenever the ratios are present, something seems to happen. This makes being aware of these lines even more important.
Another factor is the psychological factor. Because forex traders understand this concept of preference for Fibonacci numbers, they themselves influence the market by indirectly making it a self fulfilling prophecy. So the benefits of using Fibonacci become greater and if you’re not using Fibonacci, you will miss out.
Fibonacci numbers may seem confusing and complicated which they are. After all, it took many thousand years for people to discover the link between them and their meaning. Don’t worry to much though. No one today really calculates these ratios manually. This is all something that decent charting software should be able to do with the click of a mouse. It never hurts to understand the theory behind the practice, so if you are interested in this unique sequence of numbers you can read more on many other websites. Otherwise, just rest assured that you are likely to benefit from them in some way.