Fibonacci Numbers

Fibonacci Numbers

Leonardo de Pisa, Fibonacci to his friends, was a 12th century monk that dis­covered a fascinating reoccurring sequence that appeared in both mathemati­cal formulas and nature. While studying the Great Pyramid of Gizeh, he discov­ered a unique ratio of numbers. The series of numbers 1,1, 2, 3, 5, 8, 13, 21, 34, 55,89,144, 233, 377, 610 etc. is created a by adding the first two numbers together to get the third and that process continuing in sequence.

For example: 1 + 1=2, 1+2=3, 2+3=5, 3+5=8, 5+8=13, 8+13=21, 13+21=34, etc. A very interesting ratio is produced with this numbered se­quence. If each number is divided by the number following it in the sequence, it produces a remarkably constant ratio. That ratio value is 0.6180345. It has been referred to as “the golden ratio”. These ratios have been found in many studies whether in mathematics or in nature’s natural series of events. A large majority of leaf patterns involve ratios of space that correlate exactly with the Fibonacci numbers.

How these numbers are derived is not nearly as important as knowing that they do work consistently in nature, which includes human nature. The application of this number to technical analysis has become an important de­terminant of support and resistance levels. The common Fibonacci numbers are 38.2%, 50%, and 61.8%. The repetitious results that have become appar­ent through centuries of investment habits indicate that these numbers are significant when applied to human emotions.

These numbers have become important pivotal points when analyzing retracement of a trend. How these numbers were derived is much less impor­tant in understanding that they do have great relevance to many technical investors. The Fibonacci numbers are the crucial numbers for the Elliot wave analysis. Realizing that many technical investors use these critical levels to anticipate reversals, it makes sense to utilize these potential reversal levels when applying candlestick signals.