Last Updated on September 20, 2023
The Fibonacci Sequence refers to a mathematical pattern where each number is the sum of the two preceding ones. It typically starts with 0 and 1, and then each subsequent number is the sum of the last two. The pattern continues indefinitely.
This article explores the mystique behind the Fibonacci Sequence and its application in trading.
Uncovering the Origin of the Fibonacci Sequence
The Fibonacci Sequence goes back to the early 12th and 13th centuries. It was introduced to the Western world by Leonardo of Pisa, an Italian mathematician many consider the best of his time.
Due to his most famous work, the Fibonacci sequence, long after his death, a historian named him Fibonacci, which has since been his most famous moniker.
Although Fibonacci is credited with the discovery, there are reasons to believe it may have historically originated in India.
The pattern was supposedly first noticed by two Indian mathematicians in 200 BC and 700 AD.
Understanding the Fibonacci Sequence
Fibonacci encountered the sequence while studying a problem involving rabbit population growth. It later proved to be a fundamental pattern with far-reaching applications that extend to mathematics.
The first 14 terms of the sequence, as written by Fibonacci, are:
1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377
Later, zero was added as the new starting point. Each number consists of the previous two added together. 1 + 1 = 2, 2 + 1 = 3, 3 + 2 = 5 and so on.
Using this pattern, you can extend the sequence beyond the 14 numbers listed above.
If you divide a number by the previous one, the result will be very similar to the Golden Ratio (known by the symbol phi 𝝋).
For instance 8/5=1.6, 13/8=1.625, 21/13=1.61538, and 34/21=1.6190.
As you can see, every number gets progressively closer to 𝝋 – 1.61803 (rounded to five digits). You can calculate it as 𝝋 = (1+√5)/2.
Making squares with lengths equal to the numbers in the pattern gives the golden spiral, as seen here:
In his book Liber Abaci, Fibonacci showcased it by measuring rabbits’ population growth under perfect conditions.
However, this phenomenon is also evident in other aspects of nature. Branches on a tree, pinecones, flowers, shells, spiral galaxies, hurricanes, and even DNA exhibit patterns of the Golden Ratio. Some say Leonardo da Vinci and other famous artists included it in their work.
This concept found a striking portrayal in the movie PI, a cinematic exploration of mathematics and market analysis. It is the first movie by acclaimed director Darren Aronofsky. Released in 1998, PI is about several theorists gaining a deep understanding of the Golden Ratio, with implications for finance and religion.
The Fibonacci Sequence in Trading
Earn2Trade’s lessons place a significant focus on the Fibonacci Sequence and its application in trading.
The most notable example is the Fibonacci Retracement Pattern – a technical trading indicator that adds horizontal lines to your chart to indicate notable support and resistance levels (e.g., the 61.8% level).
The Fibonacci Sequence is used in trading through the Fibonacci analysis technique. It helps traders identify potential support and resistance levels and predict price retracements and extensions.
The integration of the Fibonacci Sequence into trading requires a deep understanding of the principles, consistent practice, and the incorporation of a comprehensive trading strategy.
While this analysis can provide valuable insights, it should be a holistic approach that factors in risk management and other factors influencing the market.
Conclusion
The Fibonacci Sequence is a simple mathematical pattern that bridges the gap between the natural world and trading insights. Traders can apply the Fibonacci analysis to predict price movements and identify key levels.
