This area of study is actually quite interesting. Even if you do not use it in your trading, it is worth reading up on if you enjoy maths and number patterns.

Back in the 1200s, a chap by the name of Leonardo of Pisa, also known as Fibonacci, published a book titled Liber Abaci (no, it was not about a pianist).Fibo article 1

The book introduced/discussed a number of things including the Arabic number system and simultaneous equations. It also introduced the ‘Fibonacci sequence’.

This is a mathematics concept that starts with two numbers: 0 and 1. These two numbers are added to make a third (0+1=1). Then the next number in the sequence is the sum of the previous two. So we have:

0  1  1  2  3  5  8  13  21  34  55  89  144  233 377  610 and so on

“Big deal” you say. Well, what comes next is interesting.

Take one number and divide it by the next number in the sequence. The further you move along the sequence the closer the result is to 0.618 (rounded).

If that in itself is not interesting enough, you would be amazed to learn how often this ratio pops up in nature and in our everyday life. For example:

  • They say what us humans consider to be a beautiful or perfect facial structure exhibits a 0.618 ratio between chin and forehead and chin and nose. Similar measurements are taken of eye width versus nose length (sounds silly I know).
  • The height/width of much artwork throughout the ages is close to a ratio of 0.618 – as that is what is pleasing to the eye.
  • They say the Romans invented the perfect ratio between the height of a step and its length. It is close to 0.618.
  • The Fibonacci sequence or ratio appears in nature also, such as in the arrangement of leaves, the fruitlets of a pineapple, the uncurling of a fern and many other examples.

So how do we make money from pineapple fruitlets? I have no idea, but this ratio also appears in the markets. Some people use the ratio 0.618 along with its reciprocal which happens to be 1.618 along with 1 minus the ratio or 0.382 to measure retracements, support levels and projections. Now it gets interesting!

Fibo article 2

Take a look at the weekly gold chart. The market rallied from a base of about $255, to over $100, then retraced to about $720. That is very close to a Fibonacci retracement of 38.2%. The retracement was not spot on the line. They rarely are, but it was very close.

By the way, most charting packages now have these Fibonacci levels built in. The one above is from eSignal.

Learn more:
Chapter 4 of Elliott Wave Principle: Key To Market Behavior by Frost & Prechter