Sounds like some new kind of pasta, doesn’t it?
But it’s not.
Nor it is the fella from Prison Break.
In fact, Fibonacci is a predictive technical indicator used to forecast possible future exchange rate levels.
It is a huge subject in Forex and we will be using Fibonacci ratios a lot in our trading so you better learn it and love it like your mum’s homemade chicken soup.
There are many different Fibonacci studies with weird pasta-like sounding names but we will keep it relevant and stick to the two main ones: retracement and extension.
But before we dig into that, let’s start off by introducing you to the man himself: Leonardo Fibonacci.
Leonardo was an Italian mathematician from Pisa, also know to be a super mega geek, who lived in the 13th century.
The Forex market has been around that long, you ask?
Not by a long shot.
The truth is Fibonacci retracement levels have been adapted for use in the Forex market, but they were never intended for this use.
They were originally applied to everything from studies of the universe to defining the curvature of naturally occurring spirals, such as those found in snail shells and the pattern of seeds in flowering plants.
Yes, you read that right – snail shells and plants.
He had an “Aha!” moment when he discovered a simple series of numbers that created ratios describing the natural proportions of things in the universe.
The ratios arise from the following number series: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144…
The Fibonacci sequence is a sequence of numbers where, after 0 and 1, every number is the sum of the two previous numbers. This continues to infinity.
Is that how you’re looking at your screen right now?
Don’t worry, it will make more sense in a minute.
In the Fibonacci sequence, each number is calculated by adding together the two previous numbers. It looks something like this.
And so on.
You can continue this until it’s not fun anymore.
After the first few numbers in the sequence, if you measure the ratio of any number to the succeeding higher number, you get .618.
If you measure the ratio between alternate numbers you get .382.
If you divide a number by the previous number it will approximate 1.618. This ratio is also known as the Golden Ratio, Golden Mean, or Phi.
Anyway, with all those numbers, you could put an elephant to sleep.
Let’s take a look at the interesting bit.
The golden ratio can be found in geometry, art, architecture, and even on Sonic the Hedgehog.
…and all of these
But that’s enough mumbo jumbo.
Let’s cut to the (Forex) chase; these are the ratios that as a Forex trader you HAVE to know:
0.236, 0.382, 0.618, 0.764
0, 0.382, 0.618, 1.000, 1.382, 1.618
You don’t really need to know how to calculate all of these though.
Your charting software will most likely do all the work. If not, we’ve got a nice Fibonacci calculator that can will calculate those levels for you.
However, it’s always good to be familiar with the basic theory behind the indicator so you can impress your mates (or dates?).
So get yourself a coffee and let’s explore how you can grab some pips using the Fibonacci tool in the next lesson.
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