In this article, we will look at one of the of popular methods of trading Forex and financial markets in general which is the Fibonacci number sequence. We will look at this theory of trading currencies in terms of the best tools, indicators, trading systems and strategies and see, the trading method works and it's potential to make you profits trading currencies.
Let's look at the Fibonacci number sequence in terms of its origins, the logic its based on and if it can make you a more profitable currency trader, of you use a strategy based upon the number sequence.
Who was Leonardo Fibonacci?
He has been referred to as the "greatest European mathematician of the middle ages", his name was Leonardo of Pisa, or Leonardo Pisano in Italian because he was born in the town of Pisa. He had North African education under the Moors but travelled throughout the Mediterranean. On his travels, he met merchants and studied how they did arithmetic. This confirmed to him, the advantages of the "Hindu-Arabic" system of maths over Roman numerals. He therefore, decided to introduce the Hindu-Arabic number system to Europe which is still used today to replace the Roman version. We all know it and take it for granted, the number sequence is based on ten digits with a decimal point and also the number zero.
The Fibonacci Number Sequence
The number sequence was introduced in the book Liber abbaci Which translated means, the “Book of the Abacus or Book of Calculating” and it was written in 1202. In the book, he outlines how the number sequence came to be which is was to solve a simple question which is:
If one pair of rabbits together in a certain enclosed place, and one wishes to know how many are created from the pair in one year?
In a monthly period an assumption made - if one pair of rabbits, produces another another pair and in the second month a new pair of rabbits born which produces another pair of rabbits, how does the number of rabbits grow?
So there will be two pairs in one month of which one of these which is the first pair, reproduces in the second month and then in the second month there are 3 pairs. Therefore in one month, two are pregnant and in the third month 2 pairs of rabbits are born. So there are 5 pairs in this month so Fibonacci concluded:
There would be be 144 pairs in the 10th month of which - 89 pairs born in the eleventh month which will mean there are 233 pairs in this month and 144 pairs born in the last month so we get a total of 377 pairs. You can now see how the number sequence was calculated so what has a theory,from the 13th century based on the copulation of rabbits, got to do with trading currencies? Well let's take a look...
Fibonacci Retracement Levels
The ratios in the sequence arise from the following numbers which we have just seen: 1, 1, 2, 3, 5, 8, 13, 21, 34, 55. 89 and 144. After the first few numbers if you can then measure the ratio of any number, to the succeeding higher number. You get .618. so 34 divided by 55 equals .618.If you measure the ratio between alternate numbers you get .382 so 34 divided by 89 = 0.382.These ratios are referred to as the "golden mean”!. You are probably wondering, what has this got to do with trading currencies? Well here is the answer:
Some of these ratios are considered important as levels of support and resistance in Forex. The main ratio used is .618, this is found by dividing one Fibonacci number into the next so 61.8% and other consider important numbers are considered to be 23.6% 38.2% and 50%.
The idea is there found in the natural world so they will occur in the currency markets. The problem is when they occur in the natural world they occur all the time – just like a dog is normally born with 4 legs but in a market made up of humans, they have no significance whatsoever. There is no natural law in Forex markets which works. The market is simply an odds market made up of humans who are unpredictable by their very nature and to say they conform to a number sequence is ridiculous.
How to Make Profits with Fibonacci Trading Strategies
Fibonacci trading strategies are popular with currency traders and it's surprising, how many people actually take them seriously:
“Every foreign exchange trader will use Fibonacci retracements at some point in their trading career. Some will use it just some of the time, while others will apply it regularly.”
Not so sure, every foreign exchange trader using them. I have never used them and neither has any trader I know, who makes FX profits but they remain very popular. The above site which the quote comes from is a great resource for investors but I was rather surprised, to see the above article taking this method seriously.
I have seen it called “a serious investment strategy” by some of the biggest FX brokers and even, such well known technical writers as John Murphy. It's no wonder that 90% of traders lose money when they think trading strategies like this make money. The method has no place in terms of currency trading profits and it's obviously a dumb strategy which will lose you money. Anyone who is considering using this trading method should think again, it was not devised to be used for trading currencies and it doesn't work either. The logic is completely off the wall! The idea that Fibonacci levels and retracements, act as some kind of magic levels in the market to execute trading signals is total nonsense.
There are an endless number of gurus, providing online training, on the best Fibonacci trading techniques and trading systems which I have seen including info on the following topics:
Advanced Fibonacci Forex trading techniques, extension level tools, fans, robots, expert advisors, trading courses and numerous trading strategies which all claim, this method of trading currencies, makes money. Well it does - but only for the people selling the trading systems - not for the trader buying the system or strategy!
Recently, I read an article on the top 6, Fibonacci Forex rules for profit, I read them however to I will give you the most important rule of trading Fibonacci:
Don't use this trading method, to trade Foreign exchange or any other financial market!
The logic doesn't work When trading currencies (it's not just my opinion its backed up by the facts testing it) Fibonacci is just another scientific theory, to trade FX markets which we have looked at, in our scientific scam systems article and it doesn't work – period. I find it unbelievable, so many currency traders think this method of trading works.
Finally - What Would Fibonacci think?
Leonardo Fibonacci, died sometime around 1240 and there a statue, in honour of his achievement, at the Leaning Tower end of the cemetery, adjacent to the world famous leaning Cathedral in Pisa. I once visited Pisa and the grave and sat and wondered, what he might have thought, of his theory being used to trade FX markets and execute trading signals for profit. I am sure, if he were around today he would be as puzzled as me, as to why his brilliant theory which solved a mathematical problem to do with exponential growth, is so popular as a trading method in currency trading.