Fibonacci Numbers - Using Them For Bigger FX Profits

by : Monica Hendrix

The Fibonacci Number sequence and trading Fibonacci retracements is very popular and are used to enter and exit trading signals with greater accuracy and make bigger profits - let's take a look at them in more detail.

Leonardo Fibonacci was an Italian mathematician.

He lived in the 13th century Italy The Fibonacci sequence was originally printed in the Liber Abaci, in 1202. The Book, introduced Hindu-Arabic numerals to European mathematics to replace Roman ones.

The Fibonacci number sequence was actually devised to solve the following problem:

How many pairs of rabbits would be produced from a single pair, assuming that each month each pair produces a new pair, which, from the second month, starts producing more rabbits again?

The definition of the sequence is a series of numbers where each number is the sum of the two preceding numbers; 1, 1, 2, 3, 5, 8, 13...

When applied to forex trading it's the ratios derived from the sequence that are used on forex charts: 236, .50, .382, .618, etc.

These Fibonacci retracements can then be used to execute trading signals into important areas of resistance.

The two Fibonacci percentage retracement levels considered the most important are: 38.2% and 62.8%. Other significant ones are: 75%, 50%, and 33%.

So can the Fibonacci number sequence help you become a better forex trader?

The answer is no they cant.

This is not to criticize Leonardo Fibonacci who was a talented man or a brilliant mathematician, but the levels have nothing to do with trading and were he alive today, would probably be horrified at the way his theory has been applied by the far out investment community.

The myth that the Fibonacci number sequence can be applied to trading has been perpetrated by vendors who see a good story and sell systems based upon it, of course they don't work - it's a great story, but so's Harry Potter and I don't use that to help me trade either!

You will hear that the sequence is part of natural law, which postulates that human psychology is constant and therefore repeats in line with the numbers.

However if you think about it, human nature is not predictable and NOT scientific in anyway. If it was, we would all know the answer in advance and there would be no market.

The number sequence comes up a lot in conjunction with Elliot Wave and Gann which are other scientific theories which claim to predict the future.

How accurate are they?

Probably as accurate as your horoscope.

If it's a scientific theory should work ALL the time, otherwise it's NOT a scientific theory by definition. Of course, if these theories really did work, the vendors who sell them wouldn't need to part with them for a few hundred bucks, they could keep quite and make millions.

What you really need to do when trading is think of trading as a game of odds - not certainties - because that's what it is.

That doesn't mean you wont make a lot of money you will - sure, you will lose some trades but if you trade with the odds, you will win more times than you lose and make a lot of money over time.

So if you want to trust your forex trading to a theory based upon the copulation of rabbits then go ahead - but really there are better ways to make money.

Leave the Fibonacci number sequence to the dreamers and lazy traders and trade the odds for profit.