Significance of Fibonacci Ratios
Importance and 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.
Leonardo Fibonacci, a mathematician from Italy studied nature and came up with
the following that is popularly known as the Fibonacci series.
It is simple. Add the current number with the previous one to get the next in
the above series.
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
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
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
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.
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.
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.
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
Placing Fibonacci extension ratios on the same downswing boundary, helps
determine extension exit points (red color) at 1.3500 and lower respectively
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
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.
By Harsh Japee