Fibonacci Analysis
Fibonacci Numbers are the naturally occurring number series named after a mathemetician who observed them. These were seen in such natural events as the numeric results of the propagation of rabbits.
They are built on what is known as the Golden Mean and has been known and used for millennia by artists, architects and mathmeticians.
The series propagates from one value to the next by adding the one before it to itself. There is nothing before 1. So 1 + 0 = 1, 1 + 1 = 2, 1 + 2 = 3, etc.
1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377 and so on.
These numbers have significance in trading as being foundational to Elliott Wave, Fibonacci Ratios, Fibonacci Retracements, and Fibonacci Timeframes.
Fibonacci Ratios are the result of various factorings or inversions of one Fibonacci Number with or upon another. These are heavily employed in technical analysis for trendline tools as well as other indicators and practices.
The most common usage in trading is Fibbonacci Retracements. The standard set used by a large body of traders are 23.6%, 38.2%, 50%, 61.8%, 76.4% and 100% with 38.2% and 61.8% holding the greatest weight with most technicians.
Each ratio has a numerical relationship to its neighbor and the roots of Fibonacci numbers, the number Phi ( Ø ) 1.618 and its inverse ( 1 / Ø ) .618 as well as halves and doubles of numbers in the Fibonacci series.
Fibonacci Retracements are points which are fractionally related to the immediately previous move, where frequently a stop and reversal will occur in the retracement of that move. These fractions are of course Fibonacci Ratios.
In order to calculate these ratios the move will need to be measured so it must have had its beginning at an identifiable point. This would be a main pivot for that time basis which is just one of those reversal points you can spot a mile away. Similarly the ending of that previous move must have also been clearly evident.
With those measurable pivots in place the total price travel of the move would be measured in pips. Then, marking the ratios of that travel from its end point will give locations to expect possible stop and reversal of the retracement. Most charting packages have Fibonacci Retracement tools which allow easy marking for the trader without doing the math.
The most common ratios used in trading for retracements are 23.6%, 38.2%, 50%, 61.8% and 76.4% with 38.2% and 61.8% holding the greatest weight with most technicians.
Often reversals will occur at a point near or on these calculated locations. That tendancy has been very soundly proven however any reliance on a particular one is not statistically dependable. Also while tending to bounce or pause at these areas the retracement will at times continue past them in due course.
These of course can be completely ignored by the market and a retracement reverses at some other point or no reversal takes place and instead of a retracement the entire previous move is overdone with a move in the complete opposite direction now shown.
Due to those unknowns other technical approaches are often combined for greater reliability.
A related technical method is Fibonacci Extensions
Fibonacci Timeframes is a term that has two distinct usages.
USAGE 1:
The most common one refers to periods of time or quantities of bars that are representative of one of the Fibonacci Number series. These periods are used in technical analysis to coordinate likely time and event synchronization.
This is a fairly obscure technique, being usually employed by only small subsets of Cyclic and Elliott Wave Technicians. This method frequently uses a margin of error in the neighborhood of 5 percent of the time unit.
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USAGE 2:
The other meaning refers to an even more obscure yet effective application of Fibonacci Ratios which modulates significant Fibonacci values of indicators. This Fibonacci purist technique is done in order to compensate a general lack in charting packages of an essential implementation of Fibonacci based data bar sets.
The modified indicator values simulate the existence of Fibonacci data bar timeframes. For example a commonly used 200 period exponential moving average or 200 EMA might be first improved by changing it to a near Fibonacci relative such as 220 ( 2 x 2 x 55 ).
Further enhancement to reach the maximum Fibonacci implementation would modulate the number by a Fibonacci Ratio such as 1.618 which would change the value to 356 and this would then be placed on a chart. The results yield the same VIEWPOINT as if your broker had Fibonnacci Timeframes available. The benefit of this technique is tuning technical analysis to the frequencies on which the whole behavior of markets is based.
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Introduction to Fibonacci Analysis
Using Fibonacci is much easier than most people once thought, and it can help you set up your currency trades more effectively than other types of analysis.
Fibonacci is the basis of many trading methodologies, and many billions of dollars are traded every year based on Fibonacci techniques alone.
There is a deep-rooted history associated with the basic principles of Fibonacci - named for the mathematician Leonardo Pisan Fibonacci - but we will instead focus on a series introductory articles about how you can use his series of numbers for analyzing the markets.
Let’s do cover a bit of ground before we can get to the charts. Fibonacci is best remembered for his Fibonacci sequence, which is the series of numbers where each number is the sum of the two preceding numbers. 1, 1, 2, 3, 5, 8, 13, 21, 34, 55
As traders, we are most interested in the ratio between these numbers – called the Fibonacci ratios. By comparing the relationship between each number, and each alternate number, and even each number to the one four places to the right, we derive some fairly consistent ratios.
The most important rations for trading are: .236, .50,.382, .618, .764, 1.382, 1.618, 2.618, 4.236, and for good measure we include 1.00.... This can start to look complicated, but it really isn't.
It turns out that the ratios are mathematical principles prevalent in nature all around us. What’s more is that these rations are even prevalent in man-made objects.
There are many interesting, entertaining, and poetic observations about Fibonacci numbers and ratios in the universe. Fibonacci numbers and ratios appear in ancient buildings, in plants, planets, molecules, the dimensions of human bodies, and of course rabbit populations.
But of what use is all that to the intrepid trader? Traders usually study charts! Fibonacci ratios may be applied to the price scales and also to the time scales of charts. Many traders and analysts will apply Fibonacci analysis to the price scale.
Since prices never move in a straight line, you will easily see the ebb and flow of a currency on chart. More importantly, you can see how currency prices advance and retrace, and this is the key to using Fibonacci. All currencies that are liquid will often retrace and advance in Fibonacci proportions, but not always.