Understanding Fibonacci Sequence and its Application to Trading

Fibonacci sequence is a unique order of numbers from classical statistics that is today applied to nature, advanced mathematics, trading, and agile development. Read on to understand more about the Fibonacci sequence and its application to agile development. 

Understanding Fibonacci Sequence

In the Fibonacci sequence, a number occurs from adding the previous two numbers before it beginning with zero. The numbers, in this case, are as follows. 

0, 1, 1, 2, 3, 5, 8, 13….

The Fibonacci Sequence Origin 

Leanardo Pisano Bogollo whose nickname was Fibonacci introduced this technical indicator in 1202. He belonged to an eminent Italian family between the 12th and 13th centuries. Due to his roots, mathematics played a crucial role in the business. He traveled across India and the Middle East during which mathematics ideas charmed him. Fibonacci made the following critical inputs to Western mathematics.

He popularized the Hindu techniques of number writing in Europe that is 0,1,2,3 instead of Roman numerals.

While the series of numbers seemed irrelevant, the Fibonacci sequence would later be named after him. 

What led Fibonacci into discovering this sequence? He suggested the following question. 

If a pair of rabbits is placed in an enclosed area, how many rabbits will be born there if we assume that every month a pair of rabbits produces another pair and that rabbits begin to bear young two months after their birth?

Beginning: at the beginning, no rabbits exist seeing that the previous pair of rabbits is yet to get pregnant and give birth

During the first month: a pair of rabbits is born, that is 1

During the second month: another pair of rabbits is born seeing that the previous pair are yet to mature and bear young ones.

During the third month: two pairs of rabbits breed while a pair is yet to mature, meaning that two rabbit pairs are born. 

During the fourth month: three rabbit pairs breed while two pairs are yet t mature meaning that three rabbit pairs are bred, and the sequence continues.

While Fibonacci’s question regarding rabbits is not realistic, the sequence is evident, like is the case in a series of sunflower seeds and the shape of hurricanes and galaxies. 

The Fibonacci Finance and Studies

As we have seen above, there is an exclusive ratio that can define the quantity of everything. Financial markets often depend on this ratio, which is also known as the golden ratio. When applied in technical analysis, this golden ratio translates into the following percentages: 61.8%, 50%, and 38.2%. Still, traders can use more multiples as the need arises. Application of the Fibonacci sequence can occur as follows.

·        Fibonacci Arcs

Identifying a chart’s low and high is the inaugural step towards creating Fibonacci arcs. Using a compass-related movement, you can then draw three arched lines at 38.2%, 50%, and 61.8% from the preferred point. These lines forecast the resistance and support levels and trading ranges. 

·        Fibonacci Retracements

Fibonacci retracements utilize horizontal lines to highlight areas of resistance or support. Positions are determined through the chart’s low and high points. Drawing of the lines begins at the inaugural 100%, which is the highest point of the chart. The second and third points lie at 61.8% and 50%. The fourth line lies at 38.2% while the final one lies 0% which is the lowest part of the chart. After a considerable up or down price movement, the new resistance and support levels are near or at these lines. 

·        Fibonacci Fans

Fibonacci fans comprise of diagonal lines. After identifying the low and high sections of the chart, a hidden horizontal line is marked across the correct point. The hidden line is then split into 38.2%, 61.8%, and 50%. Lines are highlighted from the far left section of these sections. These lines display areas of resistance and support. 

·        Fibonacci Time Zones

Time zones are different from other Fibonacci methods because they are an array of vertical lines. They are created by splitting a chart into sections with vertical lines separated in increments that adapt to the Fibonacci sequence. Each line displays a time where major price fluctuations are likely. 

Finally

Fibonacci studies do not offer the basic indications for predicting the entry or exit of a position. However, the numbers are crucial for determining the areas of resistance and support.