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Though not
as well-known as his counterpart Leonardo da Vinci whose creations
adorn world-famous museums, Italian mathematician Leonardo Fibonacci’s
contribution to the world of mathematics is no less noteworthy.
Besides introducing Hindu-Arabic numbers to Europe, he also
introduced a concept that grew into one of the most popular
investment theories in the world – the Fibonacci numbers.
Figuring
Out Fibonacci
The Fibonacci
numbers are a very unique sequence, with each number totalling
the sum of the previous two in the sequence. Mathematicians
have been discovering more and more interesting properties of
the Fibonacci numbers ever since Fibonacci wrote them down sometime
in the early 13th century. The first several numbers would look
something like 1, 1, 2, 3, 5, 8, 13, and the sequence would
go on into infinity.
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In fact,
one of the more interesting aspects of the Fibonacci numbers
was that you could use them to create values that approached
the Golden Ratio, one of the most mysterious and widely studied
concepts in mathematics. What’s more, you got closer to
the Golden Ratio as the sequence approached infinity.
And so you
get to the clincher question. What does all this have to
do with forex investments?
Fibonacci’s
Forex
If you’ve
done your investing homework, then you probably know all about
the Elliott Wave Theory by now. It’s that
idea by Ralph Nelson Elliott that says that the price of all
investments move in periodic waves. The movement of the prices
can be divided into several upward or downward trends which
occur one after the other.
One of the
problems with the Elliott Wave Theory is that you’re never
really sure of the extent to which the prices will decline,
and of the time when the prices will start going back up. Unless
you’re very experienced in investing, you’re left
guessing at the best time for you to invest in a particular
commodity or security. That’s the uncertainty which
you should theoretically be able to predict using the Fibonacci
numbers or, more specifically, the ratios you can form with
them.
When using
the Fibonacci numbers in forex trading, the two most important
values you should memorize are .382 and .628 – two ratios
that are reciprocals of each other. You can use them as
retracement values – that is, they indicate just how much
the price of a currency will decline as per the principles of
the Elliott Wave Theory. It still has some risks, though, such
as placing your investment using the wrong number.
Many investors
say that using the Fibonacci numbers in forex is useless, and
that the idea is a mere hoax. However, many more claim the effectiveness
of the idea.
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