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Published on Nov 15, 2007
The Fibonacci Sequence is most likely the most influential series of numbers in the world. It is also likely that you encounter the numerical pattern everyday. This mathematical series was discovered by Leonardo Fibonacci of Pisa in the early thirteenth century and was outlined in his book, Book of Calculations. 1, 1, 2, 5, 8, 13, 21, 34, 55, etc. are the "golden" numbers that are found in geometry, art, anatomy, music, biology, botany, conchology, and even trading. After the two starting values, each following number is the sum of the two proceeding numbers. Fn=Fn-1 + Fn-2
How does this relate to trading? The ratio of any number to the next larger number of the sequence is 62% (or specifically 61.8%), the "Golden" ratio. The inverse of that Fibonacci ratio is 38% (or specifically 38.2%). Mathematical psychologist, Vladimir Lefebvre suggested that traders exhibit positive and negative evaluations of the opinions they hold about the market. These negative and positive evaluations have direct correlation with the retracement percentage seen in market analysis.
You can use the Fibonacci tool on MarketClub's Java Charting Applet by clicking on the high points and most recent/major low. This will plot three ruling lines that represent a 38%, 50% and 62% markings between the chosen high and low points. These levels can help traders identify pullbacks/retracements. As you move through different time periods, the Fibonacci lines will readjust to fit various data constructs. It is possible to use this function regardless of market trend direction. The Fibonacci tools is also useful to analyze equities, futures, forex and precious metal markets.
If you are interested the Fibonacci Sequence you may also want to obtain more information on Elliot Wave and W. D. Gann.