The Fibonacci Series is a naturally occurring sequence of numbers which is encountered in the arrangement of many things including sub-atomic particles, and lines on tree leaves. The reason is not yet known, but the Fibonacci Sequence is also commonly encountered in the extension or correction of trend patterns and ranges in many financial markets. The series has been adapted to the study of markets over the years by many successful analysts, and in this article we’ll take a look at how it can be used and what it means when applied to the currency exchange market.
The Fibonacci Series is the sequence of numbers (0,1,1,2,3,5,8,13…) where each item is the sum of the two numbers preceding it. The sequence is used in this form only for the Fibonacci Time Series, in other indicators based on the Fibonacci Series, the Fibonacci ratios are used. The ratios are 0.61 and 0.38, and their extensions, 1.61, and 1.38. These numbers are simply the ratio of each number in the Fibonacci series with those preceding or succeeding it. For example, 8/5 is equal to 1.61, while, 5/8 is equal to 0.62. And when we subtract 0.62 from 1, otherwise known as the inverse of Golden Ratio, we get 0.38, which is the other important ratio used in the construction of the Fibonacci Series.
It has been observed for a long time that when each leg of a trend is extended, the size of the next movement is predicted by the Fibonacci ratios. For example, if the first leg of a trend is a, than the second leg is likely to reach a distance of 1,62a. Conversely, when there is a correction, the next stage will be determined by the same ratios. The correction of a movement of size a, for example, will be either 0.38a, or 0,62a, or something very close to these numbers.
The main tools in Fibonacci analysis are the Fibonacci Extension, Fibonacci Retracement, and the Fibonacci Time Series. The extension tries to predict the size of the next leg once a stage of a trend is completed, while the retracement indicator measures the size of the corrections. The Fibonacci Time Series merely attempts to guess the duration of each phase in the trend. For example, if head and shoulders pattern develops in a time period of x duration, the next phase will be of 2x, the third phase will last for 3x minutes, and so forth, with the numbers in the above-mentioned sequence providing the factor.
Any competent forex broker will incorporate Fibonacci series related tools into the software package. Today this method is so popular that few serious trading package can neglect to include them. The Fibonacci Series is a different type of tool that can add another dimension to your analysis and as such, it is a good idea to study, and use it whenever the opportunity arises with the purpose of gaining a better understanding of the price action.
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