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## The Fascination With Fibonacci – Trader’s Advantage

Fibonacci, not so much the man but the math, is very fascinating on its own apart from business.

It is fascinating to see how each number in the Fibonacci sequence relates to each other in some set ratio (eg..618, 1.382, etc.) and then relate these ratios to objects in nature. Within minutes of learning about Fibonacci numbers, you’ll be drawn into the world of plant proportions and the architectural world of pyramids and other monuments.

The connection between Fibonacci numbers and all things nature is also found in the world of business.

When I started trading the markets in the mid-80s, my focus was the same as many new traders. The analysis of choice was basic. Listen to the news, hear recommendations from friends and talking heads, or gloss over supply/demand numbers. But in the early 1990s, an amazing thing happened. I discovered (for myself) Fibonacci and its basic application of price and timing analysis. From then on I focused on technical analysis and never again listened to another talking head (or friend) about what to buy or sell.

Fibonacci has many applications for trading. Most traders who use technical analysis are familiar with the basic use of Fibonacci in chart analysis. Here are some basic examples:

Solution to Support or Resistance – After prices have trended in a certain direction for several days/weeks/months, from a significant low to a high, or from a significant high to a low, this is called a “range”. The trader identifies a range, then multiplies that range by the Fibonacci ratio of .382 and 618. The results are subtracted from the top price (if the range is from bottom to top) or added to the bottom price (if the range is from top to bottom) to get support or resistance price levels respectively. Often additional ratios are included in this calculation.

Solution for Timing – A basic but fascinating approach to using Fibonacci is to count the days/weeks/months between previous market tops and bottoms and multiply the calculation by the Fibonacci ratio. The result is calculated from the last top or bottom in time to where the next top or bottom is likely to occur.

Moving on from the basics of Fibonacci and chart analysis are more advanced (or often unknown) applications for ratios.

There are Fibonacci spirals used, for example, which produce both time and price results.

There are combined uses of Fibonacci ratios with time/price classification results.

There are many techniques and methods that can be used to exploit the market using Fibonacci!

Within my charting software I often use what are called Fibonacci Fan Lines. The application here is somewhat similar to the one mentioned above under “Solution for support or resistance”, fan lines produce dynamic support and resistance levels (values change for each time interval on the chart, higher for ascending lines and lower for descending lines). They also require patterns that detect two ranges (top to bottom to top, or bottom to top to bottom). You simply label the extremes of the range as A, B and C. For example, the top-to-bottom and back-to-top ranges would be labeled “A” for the first top, “B” for the bottom, and “C” for the bottom. The last top. The range from “B to C” is divided by the Fibonacci ratio and then lines are drawn in the future through the divisions of the range from “A” to “B to C”. These become your support/resistance levels.

Another attractive approach to using Fibonacci for chart analysis is to add the Fibonacci series numbers at any significant tops or bottoms to obtain possible future tops and bottoms.

For example, the series starting with 3 would be 3, 5, 8, 13, 21, 34, 55, etc. Add any two consecutive numbers in a series to get the next number in the series. Now find the top or bottom on your price chart and from there calculate 3 bars, 5 bars, 8 bars, etc. These are the time periods to watch for potential market tops and bottoms.

These are just a few examples and applications of what you can do with Fibonacci and your chart analysis. Try them yourself and I’m sure you too will be fascinated with Fibonacci!

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