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Fibonacci Forex Trading Strategy. Myth or Reality?

The Fibonacci Series is a naturally occurring sequence of numbers which was discovered by Leonardo Fibonacci in 1202. These numbers are found in many things in nature including subatomic particles, plants, spirals. The Fibonacci Sequence is also believed to commonly mark the extension or correction of trend patterns and ranges in financial markets.

The Fibonacci Series is the sequence of numbers; 0,1,1,2,3,5,8,13,21,34,55,89 etc etc, where each item is the sum of the two numbers preceding it. Mathematically, the Fibonacci Series are defined by F(n+1)=F(n)+F(n-1), n=2,3,4… You need two numbers F(0) and F(1) to start up the process. These numbers are F(0)=0 and F(1)=1. Now you can generate F(2)=F(0)+F(1)=1 F(3)=F(1)+F(2)=2 ….If you take the squares of these numbers you will get a nice spiral.

The spiral can be found in many natural structures and processes such as the cross sections of the seashells or wind-driven ocean waves.

The trading systems do not use the Fibonacci numbers directly. Instead, they use indicators based on the so-called Fibonacci ratios. The most popular are 0.618 and 0.382, and 1.618, and 1.382 and their multiples. These numbers are simply the ratio of each number in the Fibonacci series with those preceding or succeeding it. For example, 21/13 is equal to 1.618(the Golden Ratio) , while, 13/21 is equal to 0.618. And when we subtract 0.618 from 1, otherwise known as the inverse of Golden Ratio, we get 0.382, which is usually the smallest ratio used in trading. It is also interesting that the number 1.618 is unique in that its value equals the ratio of its integer part to its fractional part, i.e. 1:0.618~ is identically 1.618~:1.

The Fibonacci trading assumes that if each leg of a trend is extended, the size of the next movement can be predicted by the Fibonacci ratios. For example, if the first leg of a trend is 20 points long, than the second leg is likely to be 1.618*20pts= 32pts.

There are many variations this idea. Some traders like to start the extension from the peak of the previous leg, some like to do it from the start of the leg you are trying to calculate the extension for. Similarly, choosing which part of the “move” you are trying to mark the retracement for can be a task in itself.

The main tools attributed to the Fibonacci trading are the Fibonacci extension, Fibonacci retracement, and Fibonacci time cycles. If you are forex beginner and are not familiar with these methods of forex trading, you may use metatraders. Many of them have fibonacci retracements, extentions, time cycles and fibonacci circles.

There are also indicators for doing real time intraday calculation of “Fib” retracements and extensions.

So, why don’t you just start it with the Fibonacci trading, learn it and make your first million bucks ?

Unfortunately, there are plenty of bad news too. If markets moved mathematically and scientifically, there would be no markets at all. There are  many natural processes which do not follow the Fibonacci sequence.Generally speaking, Fibonacci numbers have nothing to do with the markets.Markets are barometers of human emotions, economic conditions and political situations. Millions of variables play a part. Trading can not be an absolute process. It is just is not the case.Becoming a successful trader is more an art than a science.

However, many forex traders claim the success with the Fibonacci trading strategy. Do they lie? Not at all. It simply means that at this particular instance of the market cycle the ups and downs of the currency appears to show the Golden Ratio pattern. The successful Fibonacci trader spots these types of the market movements, enters the game with the Fibonacci trading strategy and wins.

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