Below is an excerpt from Roy Cuzin's (www.thechartwizard.com) new E-Book "The Fibonacci Magic.
What is Fibonacci Really?
An Accidental Discovery...
The more appropriate question should be who is Fibonacci really? Leonardo Bonacci (1170 – 1250) known as Fibonacci was an Italian mathematician, considered by many to be the most talented western mathematician of the Middle Ages. In his days, Fibonacci was a very active scientist and was accredited for a number of important scientific publications such as Liber abaci (1202), Practica geometriae (1220), Flos (1225), and Liber quadratorum (1225). However, as important as these publications may have been, Fibonacci acquired his legendary reputation by a whole different, yet extraordinary phenomenon, which he discovered by accident through his work on Liber abaci – his most famous craft. Nevertheless, it is merely the strong connection of his accidental discovery with the study of price movement, which granted him as one of the most influential scientists in history. As a matter of fact, back than in the 12th century the applications for Fibonacci’s discovery were limited mainly to the fields of mathematics, agriculture and architecture. Therefore, from the general public’s point of view Fibonacci’s amazing discovery stayed under the radar for literally centuries to come. Many years after Fibonacci’s demise, around the beginning of the 20th century and alongside the rise of modern financial markets, his discovery was finally getting the public’s attention and the appropriate worldwide recognition that it so truthfully deserved. Now a days it is known as The Fibonacci Sequence and as far as I’m concerned, it is the most powerful tool (among the very few that actually work) that the Technical Analysis body of knowledge has to offer. Its application has a huge effect and impact over my trading activity and performance, as I’m sure it has over many other successful traders. It all began with a seemingly innocent looking problem in the third section of Liber abaci, which led to the introduction of the Fibonacci numbers and the Fibonacci Sequence. Interestingly enough, Fibonacci was simply trying to figure out how many pairs of rabbits can be produced in a year, if a certain someone puts a pair of rabbits in a place surrounded on all sides by a wall, and it is assumed that every month each pair produce a new pair, which from the second month on becomes productive. After a few experiments of this kind, Fibonacci was amazed to find out that the rabbits’ production cycles were similar in all of his observations. Furthermore, he could pinpoint the exact sequence of the rabbits’ production and therefore, predict the rabbits’ natural demographic growth with accuracy that was never seen before. But that was still just a drop in the bucket. The real astonishment came a little bit later, when Fibonacci realized that this divine sequence of numbers that he just magically picked up on, is literally everywhere.
Part of the Laws of Nature
The Fibonacci numbers are nature's numbering system. They appear everywhere in nature, from the leaf arrangement in plants, to the pattern of the florets of a flower, the bracts of a pine cone, or the scales of a pineapple. The Fibonacci numbers are therefore applicable to the growth of every living thing, including a single cell, a grain of wheat, a hive of bees, and even all of mankind. Moreover, the Fibonacci sequence is also governing space. The relationship between the elliptical rings caused by the trajectory of the planets in their orbit around the sun, perfectly matches the Fibonacci sequence. To be honest, the list of examples for the Fibonacci sequence application is endless and far beyond our scope of interest. However, it is highly important to understand that the Fibonacci sequence is a law of nature. Just like Gravity, Electromagnetism, the Law of Relativity or any other natural law for that matter. The way I see it, it’s the heart bit of the universe. It is the rhythm in which every living organism or system in the universe is dancing to. Ironically somewhat, the structure of the financial markets forms the ultimate living organism, which is probably why it has such a profound effect on price action. The mind boggling domination of the Fibonacci sequence over the universe in general, and the financial markets in particular is rather philosophical in nature, and expands to the field of quantum physics. I could easily go further down the rabbit hole with philosophical explanations of the phenomenon, but then again, from the perspective of practical trading practices it would be unnecessary and irrelevant, just as there is really no need to dig deep about the mechanics of the carburetor in order to become a professional race car driver. Instead, we should try to fully understand the powerful meaning of Fibonacci’s applications on price analysis, as well as the right implementation of these principles, if our goal is to substantially improve our trading skills and performance. So what is this Fibonacci sequence of numbers? Simply put, starting from zero each number is the sum of its previous two numbers. The calculation can carry out infinitely, although Fibonacci himself carried the calculation up until the fifteenth place, that is 377. The sequence is as follows: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377... But that’s just the basics. The real magic begins with the relations between these numbers. The values derived by dividing a number with its previous numbers results in a set of unique ratios that are well known as the Fibonacci Ratios. These ratios are the building blocks of all Fibonacci’s applications, not only in the context of financial markets, but also in the context of many other fields of practice.
Basic and Traditional Applications
The whole concept of the Fibonacci Ratios is to represent the nature of progress and retracement in practically any complicated system or living organism. It turns out that anywhere in the universe, cycles tend to obey a specific set of rules. The great discovery of Fibonacci made it perfectly clear as these rules began to unravel. Just think about the tidal phenomenon. Tides naturally rise and fall as a result of the gravitational forces exerted by the moon and the sun, as well as by the rotation of the earth. The increments of these ebbs and flows can be accurately measured, calculated and predicted, all because of the Fibonacci Ratios, which apparently have the exact same effect over the cyclical movements of the moon, sun and the earth. If we move a little bit down the rabbit hole, the philosophical view is that it all begins with our solar system as the primary driving force of all cycles and phenomenon on planet earth. That is why the same Fibonacci Ratios are applicable everywhere in nature, including the financial markets, which are also the creations of nature – humans. There are a few well known Fibonacci applications used by traders and investors such as Arcs, Fans, Time and Price Extensions. However, it is safe to say that the most basic and popular application is the Fibonacci Retracement. The Fibonacci Retracement uses the ratios to measure the potential amplitude of any correction in price action, following a progressive wave. The obvious purpose is to identify and to time potential reversal points, right when the corrections terminate and the trends resume their primary direction. There are 3 major retracements levels derived directly from the Fibonacci sequence:
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ABOUT THE AUTHOR
Roy is an independent Professional Trader, making a living off trading the currencies and commodities markets. He trades the markets with his revolutionary and success proven model - Fibonacci Matrix™, which he developed over the past 7 years. Roy specializes in short to medium term strategy trading with a systematic approach and guaranteed success over the long term. Roy holds a B.A. in Economics (Tel-Hai University) and M.A. Certified Financial Technician by the IFTA (International Federation of Technical Analysis) with over 12 years of experience in analysis and trading the markets (mainly Foreign Exchange and Commodities) as well as Coaching, Mentoring and Training private Investors, Traders and the industry related employees. Roy’s extensive trading experience ranges from highly reputable investment houses such as Bridge Hall Stockbrokers (London, UK), USGFX, AlgoPlus, MTE-Media and Ibrokers.
CONTACT THE AUTHOR
Website - www.TheChartWizard.com
Twitter - https://Twitter.com/Roy_Cuzin
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LinkedIn - https://ca.linkedin.com/in/roy-cuzin
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E-mail - RoyCuzin@TheChartWizard.com
Drink Forex does not offer trading advice and nothing in this article should be considered trading advice. It is for educational purposes only.