Fibonacci in Trading

Love Trading Buy/Sell Arrow Signals? Try This!

The Fibonacci Series is a naturally occurring sequence of numbers which was discovered by Leonardo Fibonacci (fi-bo-na-chee) in 1202. It is found in the arrangement of many things including sub-atomic particles, plants, spirals etc. The Fibonacci Sequence is also believed to commonly mark the extension or correction of trend patterns and ranges in financial markets.

The series has been adapted to the study of markets over the years by many successful analysts, and in this article we’ll take a look at how it can be used and what it means when applied to the currency exchange market.

The Fibonacci Series is the sequence of numbers; 0,1,1,2,3,5,8,13,21,34,55,89 etc etc, where each item is the sum of the two numbers preceding it. The sequence is used in Fibonacci Time Cycles, in other indicators based on the Fibonacci Series, the Fibonacci ratios are used. The ratios are 0.618 and 0.382, and 1.618, and 1.382 and multiples there of are used in calculating extensions.

These numbers are simply the ratio of each number in the Fibonacci series with those preceding or succeeding it. For example, 21/13 is equal to 1.61, while, 13/21 is equal to 0.618. And when we subtract 0.618 from 1, otherwise known as the inverse of Golden Ratio, we get 0.382, which is usually the smallest ratio used in trading.

It has been observed for a long time that when each leg of a trend is extended, the size of the next movement is predicted by the Fibonacci ratios. For example, if the first leg of a trend is 20 points long, than the second leg is likely to be 1.618*20pts= 32pts (aprox). However as with all trading methods things are not always simple. Some traders like to
start the extention from the peak of the previous leg, some like to do it from the start of the leg you are trying to calculate the extension for. Similarly, choosing which part of the “move” you are trying to mark the retracement for can be a task in itself.

The main tools in Fibonacci analysis are the Fibonacci extension, Fibonacci retracement, and Fibonacci time cycles.The Fibonacci Time Cycles attempt to mark the duration of each phase in the trend in advance. The time cycles work in very similar fashion to extensions and retracements but use vertical lines. You would mark to parts of the chart and lines at 138.2% and 161.8% and 2% would be drawn, assuming your two points were set at 0 and 100%. You could always use 61.8% if you were thinking that the trend was not complete and you were just marking the first leg of a trend.

There are many different “fib” trading tools you can use and most charting packages, including metatrader and ninjatrader have plenty to choose from. Ninjatrader have fibonacci retracements, extentions, time cycles and fibonacci circles. There are indicators also for doing real time intraday calculation of fib retracements and extensions.

You will find that many traders use Fibonacci levels in association with Elliott Wave counting. If you do not understand why you soon will when you study Elliott Wave. In short Elliott Wave involves counting waves/legs in trends. So naturally the theory can use Fibonnaci ratios to mark the length of the trends and retracements. However, EW theory is quite a long subject I suggest if you have not learnt about it you make want to check out “the Elliot wave principle” by Frost & Prechter. Naturally the internet is full of free sources of information on the subject.

Free Trading Systems. Metatrader Indicators.Expert Advisors.Forex Forum. Privacy Policy    
© 2009-2010 Great Trading Systems. All rights reserved.