The Fibonacci number sequence and golden ratio is found throughout nature.
The Fibonacci sequence was discovered by Leonardo Fibonacci in 1202, and the Fibonacci number sequence is based around the following equation:
How many pairs of rabbits can be generated from one single pair, if every month each pair produces a new pair, which, from the second month, starts producing more rabbits?
The Fibonacci number sequence and golden ratio was used to answer the above question and produced a number sequence that has importance throughout the natural world.
After the first few numbers of the sequence, the ratio of any number in relation to the next higher number is approximately .618, and the lower number is 1.618.
These two figures represent the golden mean, or the golden ratio.
There are numerous examples of the Golden Ratio throughout the natural world:
Sunflowers, which have opposing spirals of seeds, have a 1.618 ratio between the diameters of each rotation.
In a beehive, divide the number of female bees by the number of male bees - and you will get 1.618.
This same ratio can be seen throughout nature – e.g. snail shells, galaxies, hurricanes, and even DNA molecules.
When used in technical analysis, the golden ratio translates into three percentages: 38.2%, 50% and 61.8%. More multiples can be used when needed, such as 23.6%, 161.8%, 423%, etc.
Many Forex traders believe that these levels can be used as support and resistance, when a trend retraces these levels. These forex traders use them - but do they work?
The answer is: No, most of the time they don’t work.
Of course, you’ll see many examples when they do work, but in forex trading you could guess a level, and still get the same success rate.
It’s all very mystical, and appeals to the far out, wacky brigade - and those who think that markets move to scientific law. Of course, what these traders are forgetting is: If markets moved scientifically, there’d be no market – we’d all know the price in advance!
A currency market by its nature, involves uncertainty - that’s what makes a market move - the fact that human nature is un-predictable.
If you want to join the believers of Fibonacci numbers, go ahead – but do you really want to risk your money, with a theory derived from the copulation of rabbits?
I’m sure that if Leonardo Fibonacci were alive today, he’d be amused at the way his theory has been hijacked by the investment community - and put to use in an area where it has no significance at all.
If you want to win at forex trading, then forget scientific theory. Forex trading success comes from trading the odds - and you need to see currency trading as a game of odds - not a game of certainties.