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Significance of Fibonacci Ratios

Significance of Fibonacci Ratios Significance of Fibonacci Ratios


Importance and Significance of Fibonacci Ratios

Significance of Fibonacci Ratios We shall base our discussion on Fibonacci Ratios on Nature. Believe it or not, anything that follows nature would follow Fibonacci ratios. Let us look into the history of Fibonacci numbers first.

Significance of Fibonacci Ratios Leonardo Fibonacci, a mathematician from Italy studied nature and came up with the following that is popularly known as the Fibonacci series.

0,1,1,2,3,5,8,13,21,34,55,89,144…… infinite.

It is simple. Add the current number with the previous one to get the next in the above series.

Significance of Fibonacci Ratios A few natural examples are:

1. Breeding pattern of rabbits. A pair produces 2 pairs, then 3 pairs, then 5 pairs and so on.

2. A piano octave consists of 1 black key, having 2 white keys at its base. Then 2 black keys, having 3 white keys at its base. Then 3 black keys, having 5 white keys at its base.

3. In certain plants, the growth in leaves/stems in according to above series.

Significance of Fibonacci Ratios Let us take a random pair from the above series: 21+34=55. Applying simple mathematical division on the above (not going into details here); a few ratios are derived.

0.382

0.50

0.618

0.786

1.271

1.618

2.618

Significance of Fibonacci Ratios The above ratios are commonly known as Golden Fibonacci ratios and an amazing fact is that the above results are the same when applied on to any pair of the above series.

Significance of Fibonacci Ratios Out of the above, 0.618 has got vital importance as seen in nature.

1. Height divided by base of a pyramid equals 0.618

2. Circumference of moon divided by circumference of earth is 0.618

3. Ratio of frequency of Key A and Key c of a piano is 0.618. Music composed using key A and key C is very soothing to hear.

There are many more examples scientifically proven and documented. These amazing fact leads to implementing Fibonacci ratios on Charts.

Significance of Fibonacci Ratios Fibonacci ratios are used by chartists to determine optimum entry and exit points, vital from a traders’ perspective. Indirectly, a proper use of Fibonacci ratios determines potential future supports and resistances.

Significance of Fibonacci Ratios To elaborate further, the 0.382, 0.50. 0.618 and 0.786 are levels of retracements (entry) or pullback. They help us find a high potential entry point (buying or selling). While the 1.271 and 1.618 are levels of extension (targets). Below chart explains.


 

Significance of Fibonacci Ratios The above is a EUR/USD daily chart view. The fall between May 08, 2014 and May 26, 2014 consists of the downswing. Placing Fibonacci retracement ratios on this boundary helps determine a potential entry point at 0.618 levels around 1.3850/60.


 

Significance of Fibonacci Ratios Placing Fibonacci extension ratios on the same downswing boundary, helps determine extension exit points (red color) at 1.3500 and lower respectively


 

Significance of Fibonacci Ratios Above chart shows a historic upswing of USDJPY between Oct 2011 and May 2013 with upswing, potential buy entry at 77.50/78.00 (the Fibonacci 0.786 retracement level) and a potential exit at 97.90/95(the Fibonacci 1.618 extension level.

Conclusion:

Significance of Fibonacci Ratios Applying Fibonacci ratios on the potentially active upswings or downswings can make a huge difference in earning potential of a trade. This combined with knowledge of support-resistance and trends can help Trade with Confidence.

Happy Trading!!

By Harsh Japee

January 2014


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