Fibonacci numbers are a mathematical sequence of numbers that are sometime called the Golden
Ratio. Many forex and commodity traders swear by the magic of these numbers and their accuracy
in predicting price movement. In the 12th century, when Leonardo Fibonacci,
an Italian mathematician, created his numerical sequence there was no such thing as the financial
markets and these numbers were based on how rabbits multiplied. What is intriguing about
the Fibonacci sequence is not the numbers in the series but their ratios. The Golden
Ratio, roughly 1.618, appears to be prevalent among us in nature. It is said that even the
behavior of the financial markets conforms to this ratio.
Pertaining to Forex, these numbers help analysts to determine specific changes in the trends
of the market. The numbers in the sequence are 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89,
144..... All these numbers tend to lie near the lines
of market graphs. These lines are called Fibonacci lines. There are four major types of studies
done on Fibonacci's work -- fans, time zones, arcs and retracements with retracements being
the most popular. A retracement in forex is the likelihood that
a specific financial assets price will revert to a prior move or not. The number is evaluated
based on whether it supports or rejects the various levels and numbers before it continues
back to where it was intended. Analysts study retracements by drawing various
trend lines between a variety of points on a graph. After choosing two points, they divide
them by the difference in the distance by ratios that Fibonacci has determined are 23.6%,
38.2%, 50%, 61.8% & 100%. Traders use these numbers and the analysis from them to determine
where profits can be made in the market. Ultimately, utilizing Fibonacci lines is a key strategy
in success in Forex.