Leonardo Fibonacci was a 13th century Italian mathematician who is regarded as the most gifted of the mathematicians in the middle ages. He is credited with popularizing the number sequence in the West (named after him) by learning the Hindu-Arabic numeral system which was already being used by Indian mathematicians since the 6th century.
In a Fibonacci sequence, every consecutive number is the sum of the previous two numerals starting with 0. So it goes like this:- 0,1,1,2,3,5,8,13, 21,34,55,89,144,……. The underlying universal fact in this sequence is that if you take up any two consecutive numbers (a little higher up in the sequence) and divide the smaller number by the larger one (for instance dividing 8 by 13 or 13 by 21 and so on), you will always end up with a decimal or a proportion which remains identical throughout which is 1.618 or 1:1.618.
Fibonacci Retracements applications in Forex Trade
Correlating Fibonacci Retracements with financial markets, especially forex, indices, securities, commodities or futures assumes special significance as one is able to predict almost to precision when a particular security or currency pair will exhibit an upward reversal or bounce back. Conversely, one is correctly able to forecast when a currency pair will have a downward movement before coming back to its original position.
In this respect such a trend is more in keeping with Newton’s Third Law that states: - “For each and every action there is an equal and opposite reaction”. But it is also true that in financial markets around the world bouncing back of currency pairs, stocks, securities or commodities (both for upward or downward reversals) , the opposing move or force keeps on getting weaker.
The Fibonacci numbers or sequence takes account of this weakening of market forces much better than Newton’s Third Law of Motion. Many of nature’s creations follow Fibonacci creations like the patterns and structures of flora and fauna. As far as the forex market is concerned which is not only the oldest but also the largest existing form of financial market, the Fibonacci sequence is used profusely to analyze and predict the future trends and behavior of different aspects impinging on forex trade.
All said and done, it cannot be inferred that Fibonacci sequences will always be able to correctly forecast movements, fluctuations or surges in real-time. Margin of error always exists. Fibonacci retracements applications hold good if enough individuals are using them for their forex trading activities for a certain time period. These retracements can be used for both short and long term predictions.
Before you can go on to use Fibonacci retracements for predicting future reversals, you should have the knack or the wisdom to identify a surge or a fluctuation. It is a skill that you cannot pick up overnight. You’ll need to study charts for hours on end for many days before you master the skill of spotting a move. Thereafter, you can dabble with Fibonacci number sequence retracements, to correctly make figure out rebounds or reversals for better profit margins.
If you can pick up the mathematical skills involved in Fibonacci sequence, you can use the retracements for trading in a more meticulous manner by correctly analyzing and interpreting the prevalent or current trends. As you know that every tendency or pattern in any type of financial market tends to attain a state of equilibrium, you can apply this principle in your forex dealings and transactions as well. The currency pairs that you deal in are more often than not heavily traded (either heavily bought or sold) and so you can expect a currency pair to attain an equilibrium position tantamount to a Fibonacci retracement level.