Fibonacci numbers are part of the Fibonacci sequence, where the two previous numbers are added together to calculate the next number in the sequence. The ratio of two Fibonacci numbers is the Golden Ratio, or 1.61803398875, which has been used since ancient times as the perfect proportion in architecture and other design. The Golden Ratio is also known as Phi (pronounced “fee”). Because Fibonacci numbers are found throughout the natural world, they have been integrated into some traders’ strategies for market analysis.
Modern computing power has uncovered plentiful examples of the Golden Ratio in nature, from Nautilus shells to musical harmonics, as well as in mathematical fractal patterns. Fibonacci numbers are related to the study of chaos theory, which seeks to find order in complex systems. Since the markets have so many variables, but no lack of data, they are an excellent place to search for Fibonacci patterns. Fibonacci techniques are similar in many ways to Elliott Wave Theory, which uncovers larger trends and investor sentiment by smoothing and “zooming out” from market price action via using larger-interval moving average.
Fibonacci arcs and lines are drawn as overlays on price charts, and some analysts use them as the most likely places of support, resistance, and retracement. While charts will most often not adhere completely to the Fibonacci lines, and only certain ones seem to correlate, there may be some empirical relevance to this type of analysis.
But Fibonacci filters for trading signals are, like all technical indicators, imperfect at best. The use of Fibonacci lines in trading is still in its early stages, but ever-growing computing power available to traders increases their ability to find the common threads that will make this investment theory more usable, accurate, and reliable. These include artificial intelligence services from Tickeron, which provide traders with powerful ways to evaluate trade ideas, analyze signals, and provide key confirmation to help investors make rational, emotionless, and effective trading decisions.
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