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The use of the Fibonacci series as part of a forex trading strategy has been popular among traders for a number of reasons. First of all, this mathematical tool has a clear and easily observable predictive power over market events, although that power is not as precise as we would like. Secondly, it is not some hypothetical construct of a trader, but a real natural phenomenon that backs the efficiency of the Fibonacci Series when applied to forex analysis. In all, many traders apply this tool regularly in their trading, and its popularity is proof of its efficiency at least as far as traders themselves are concerned.

What is Fibonacci Series?

The Fibonacci Series is the sequence of numbers (0,1,1, 2,3,5,8, 13, 21…) where each number is the sum of the preceding two. For example, 21 = 8+13, 13 = 8 + 5, and so on. The value of this infinite series is in its tendency to appear in countless natural formations, from the linings on tree leaves to the microscopic world of subatomic particles. In other words, it is somehow the structure of the natural world at different levels which allows this series its significance. Since trading is no less a part of the natural world than are atoms or tree leaves, it is only natural that patterns observed in the market action can also be defined through the Fibonacci Series at times, especially if we remember that at the level of mathematics and analysis all these phenomena are mere numbers. In trading, we often use the ratio between these numbers, which is the Golden Ratio of 1,61, or 0.61. This ratio is found between to successive numbers in the series. For example, 13/8 = 1.61, while 8/13= 0.61, approximately. The inverse ratio of 0.38 is found between numbers that a skip a member. For example, while 8/13 is 0.61, 5/13 (if we skip the number 8 between 5 and 13) is 0.38. These two ratios, 0,38, and 0,61, along with their extensions of 1,38 and 1,61 are extremely important in the analysis of trading patterns.

If you have ever tested your trading by taking a cursory look at the various patterns in trading and applying the Fibonacci Series in an haphazard manner, you will not fail to notice that the internal structure of trends and range patterns are often determined by the Fibonacci ratios. It’s very common to see the size of the correction of a major trend be determined by multiplication with a factor of 0.38, or 0.61, which are the Fibonacci Ratios. For example, if the movement of the trend had a size of x, its correction would be of size 1,38x, or 1,61x. This magical number is encountered in many similar cases, and it’s very common in both range and trend patterns.

The Fibonacci extension and retracement tools simply display visual levels to demonstrate where price levels indicated by these ratios reside. The market action is then expected to gravitate towards these areas. The Fibonacci Time Series, on the hand, applies the numerical series to the timeframe of trading, and estimates to the duration of each phase of a trend. For example, if the present triangle formation lasts for a time period of 3x, the next formation, which may be a head and shoulders pattern, will last for 5x, while the following lasts for 8x, and so on.

The forex market is always volatile, so make sure that you employ suitable money management methods to reduce your risk as you apply this tool, as you would with any other. Still, the Fibonacci series is a wonderful addition to your arsenal with its proven and novel approach to the study of price patterns.

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