Fibonacci Trading Basics

Fibonacci trading is extremely popular among those who use technical analysis for online stock trading, stock market analysis, swing trading, day trading and all types of trading systems. Fibonacci retracement measurements are the most popular use of the numbers.

It is often used with other technical analysis indicators such as a moving average, stochastics, RSI, candlestick patterns, etc.

When using Fibonacci Forex, stocks, futures and commodities can all be traded using the Fibonacci retracement of a trend.

So what is “Fibonacci” and where does it come from?

The Fibonacci sequence is named after a man named Leonardo of Pisa, who was known as “Fibonacci” (which means “son of Bonaccio”).  He wrote a book in 1202 which introduced the sequence of numbers to Western European mathematics (though the sequence had been known and used in India well before Fibonacci).

The Fibonacci sequence is simply beginning with the numbers 0 and 1, and then each number after that is the sum of the previous two.

So …

0 + 1 = 1

Then you take the sum of the last 2 numbers of the above equation and add them:

1 + 1 = 2

Then you take the sum of the last 2 numbers of the above equation and add them:

1 + 2 = 3

Then you take the sum of the last 2 numbers of the above equation and add them:

2 + 3 = 5

Then you take the sum of the last 2 numbers of the above equation and add them:

3 + 5 = 8

Then you take the sum of the last 2 numbers of the above equation and add them:

5 + 8 = 13

Then you take the sum of the last 2 numbers of the above equation and add them:

8 + 13 = 21

… and on it goes to infiinity!

So the Fibonacci numbers are:

1,  2,  3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, etc.

So what is the significance of these numbers for stock market analysis, swing trading, technical analysis and trading systems? And is Fibonacci trading legitimate?

Fibonacci numbers have many ramifications and applications in the field of mathematics. Those who feel that the stock market, Forex and futures markets operate in mathematical precision are attracted to Fibonacci trading and look for Fibonacci retracement levels for this reason.

“Fib numbers” (as they are often referred to) also appear in many aspects of nature such as the arrangement of leaves on a stem and the branching of trees. Some day traders, swing traders and investors therefore say that the nature of the financial markets also manifest themselves in the structure of Fibonacci numbers.

Now the big question: Do Fibonacci numbers have a dramatic influence on the financial markets? Should you use Fibonacci trading in your trading system to help with your stock market analysis?

It’s impossible to prove. However there is no question that Fibonacci trading has become wide-spread in the use of technical analysis, taking a prominent seat next to other commonly used techniques such as moving averages and stochastics.

Therefore Fib numbers are indeed significant in trading if for no other reason than they become a self-fulfilling prophecy through their use by a massive number of Fibonacci Forex, stock and futures traders. 

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