Here we will look at Fibonacci trading systems and there application to currency markets to help you gain a trading edge. So can you make bigger profits using a Fibonacci trading system? Lets take a look at this method of trading in more detail.

Fibonacci Trading

Leonardo Fibonacci was a brilliant Italian mathematician who lived in the 13th century and is known worldwide for his Fibonacci number sequence which has become very popular with Forex traders. Forex traders use the numbers, to calculate Fibonacci retracement levels and look to gain better market timing for their trades by using them. Let's look at Fibonacci Forex trading methods in more detail.

The Number Sequence

The Fibonacci sequence of numbers was first printed in the Liber Abaci, written by Leonardo Fibonacci back in the year 1202. The book was ground breaking at the time and introduced Hindu-Arabic numerals which replaced the Roman numeral sequence.

A Question and an Answer

Most Forex traders don't why the number sequence came to be was created to solve a mathematical problem which was based on the copulation of rabbits and posed the following question which needed to be answered:

How many pairs of rabbits will be produced from one single pair, if every month each pair produces a new pair, which, from the second month these rabbits will also start to reproduce?

The question was of course answered with the Fibonacci number sequence, the sequence is a series of numbers where each number is the sum of the two preceding numbers so we have - 1, 1, 2, 3, 5, 8, 13 etc.

After the first few numbers of the sequence it was noticed that the ratio of any number in relation to the next higher number in the series is approximately .618, and the lower number is 1.618 which leads up on to the Golden Mean or Ratio which is seen as showing natural order throughout the known world.

The Discovery: The Golden Mean and Golden Ratio

The two numbers above represent the golden mean, or the golden ratio and there are several examples of the Golden Ratio which can be seen throughout nature and it's also believed that these numbers also order the financial world.

In terms of nature sunflowers, have opposing spirals of seeds which have a 1.618 ratio between there diameters, In a beehive, if you were to divide the number of female bees by the number of male bees, you will get a ratio of approximately 1.618. This same ratio can also be seen in many other areas from snail shells, to the weather and even can be seen in human DNA.

Fibonacci Forex Trading Using the Number Sequence

In FX trading (although the Fibonacci number sequence can be applied to any market) the ratios, are derived from this sequence of numbers which are the used to show levels in the market. These levels are considered important in terms of generating high odds trading signals are: .236, .50, .382, .618, etc.

These numbers represent the Fibonacci retracement levels which traders can use to look out for levels of support or resistance in a currency pair.

The two Fibonacci percentage retracement levels considered the most valid are: 38.2% and 62.8% and other levels which are also used by traders to define support and resistance are the levels: 75%, 50%, and 33%.

Can Trading Fibonacci Retracements Make You Money and Give You an Edge?

While this method is popular and there are many Fibonacci trading systems used, they are not a great way to trade the markets and wont give you an edge and basing a Forex trading system on a theory which was devised to solve a problem to do with the copulation of rabbits is ridiculous.

The numbers are supposed to be scientific but if they are, they should be working all of the time, not just some of the time. Do they work all the time?

Final Words

Of course they don't so they cannot be considered to show natural order and its a fact you can compare the Fibonacci number sequence with a random one and the random one will do just as well.

This theory is nonsense and really has no place in Forex trading - but guess what? Huge numbers of traders use a Fibonacci trading system but don't let that worry you, most traders lose money