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Trading in Market with Fibonacci sequence

written by: Charles M Bowen•edited by: Rebecca Scudder•updated: 4/30/2009

Market analysis based on Fibonacci sequence and Golden Ratio helps investors and traders determine with relative accuracy the price behavior, the ideal entry and exit points and stop-loss levels.

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    Fibonacci numbers, to those who may not be familiar, were named after an Italian mathematician called Leonardo Fibonacci. Without getting too much bogged down into technical details, Fibonacci numbers can be simply stated as a series of numbers in which the next number in the sequence is obtained by taking a certain number in the sequence and adding to it its predecessor.

    People interested in Fibonacci numbers must also understand the theory of Golden Ratio that is intimately connected to Fibonacci. According to this ratio rule, 0.618 is the ratio of a number in Fibonacci sequence to the next higher number and 1.618 is the productive ratio of a Fibonacci number to the previous lower number.

    Market analysts claim that the use of our Fibonacci series trading analysis is directly related to natural law and human behavior. It is found Fibonacci sequence technical analysis helps remove all the skepticism regarding the concept of fair trading at its fair trade value. This analysis justifiably includes various external influences such as market analysis, investor viewpoints and media coverage which are responsible for up and down movement of stock prices.

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    Fibonacci and Stock Market

    Dabblers in stock market are fully aware that trading in stocks is not all about good fortune. Basic requirement like hard work, shrewdness and sharp mathematical skills are extremely important. Fibonacci analysis, in fact, is the most recommended technique to learn basic concepts of stock trading.

    The relationship between Fibonacci and stock market has been extensively researched over a long period of time by a galaxy of traders. Now investors appreciate the benefits of applying Fibonacci sequence. The Fibonacci theory shows that a five-wave series is used to describe market movements, especially those which have huge market impact. Further, it becomes a handy technique in identification of critical parameters of stock market trading and helps in determining major turning points with frequent appearance of Golden ratios irrespective of the current state of the market (high or low).

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    Fibonacci and Forex Trading

    It is a known fact that in Forex trading, the currency of one nation is traded for the currency of another nation. Thus the trader in foreign exchange must be fully aware of the international market trends as there can be a real risk factor inherent in changing market situations.

    A beginner will find it tedious initially but they can master this forex trading by applying Fibonacci Technical analysis. A number of floor traders use what are called “Fibonacci Retracement" levels and claim that knowing these levels makes them to become confident foretellers of the trade behavior.

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    Secrets of Fibonacci and Traders

    Fibonacci numbers are a great fascination with traders who use Fibonacci numbers in setting what is called as stop loss orders. There are different Fibonacci Retracement Level Percentages like 75%, 50%, 33%, 38.2,% and 68.2%. Among these, 68.2% and 38.2% are important percentages for Retracement level. For instance, if 0 is the initiating price and 100 is the peak price, the Retracement level percentage in this case would be 50 % if the price declines to 50. This is just the same scenario what we pragmatically observe in the market without any technical back up. In a downward moving market which is subject to experience upward push, these Retracement levels can be easily applied.

    Using Fibonacci technical analysis, a trader can set placement levels for stop loss by specifying certain zones of trading which act as important criteria for market analysis. Once zones are defined, a Fibonacci number can help define stops in different market scenarios like the support zone under placement level getting violated or trading price falling down. One of the biggest advantages of Fibonacci Retracement levels is that it supports pre-defined exits for traders without incurring much loss.

    One can learn Fibonacci techniques of market analysis through a number of ways like referring to some trading books, attending seminars and institution counseling or by taking online courses for both basic and advanced level trading. Understanding stock market with the technical application of Fibonacci sequence is always helpful in the long run.