We have prepared an article on what you need to know about the Fibonacci sequence, which appears in many places from the financial markets to the world order.
As we all know, there is an incredible order and harmony in many substances in the world. Throughout history, thinkers and mathematicians have studied this order. The sequence of numbers discovered by Leonardo Fibonacci is one of them.
The Fibonacci sequence is calculated by adding the two numbers before each number. The ratio of these numbers allows us to reach the golden ratio. For this reason, this series of numbers is referred to together with the golden ratio. Therefore, it arouses more curiosity.
Now let’s take a look at the details you need to know about the Fibonacci sequence.
What is the Fibonacci Sequence?
It is a sequence of numbers developed by the Italian mathematician Leonardo Fibonacci in the 13th century. The mathematical sequence named after its creator is used to create technical indicators.
In the Fibonacci sequence starting with 0 (Zero) and 1 (One), each number is found by adding the two preceding numbers.
The sequence goes on forever like this: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987, 1697, …
This sequence can give clues as to the range in which certain financial instruments will move. For this reason, Fibonacci sequences are also included in technical analysis.
The Fibonacci sequence is also important as it is associated with the ratios of 1.618 and vice versa 0.618, known as the golden ratio.
When moving forward by dividing each number in the number sequence by the number that comes after it, the number 0.618 is approached. In addition, each number is divided by the number that comes before it to get 1.618.
Why is the Fibonacci Sequence Important?
The golden ratio appears in many examples, from our index finger to sunflowers, from cones to Egyptian pyramids. In many mathematical shapes and formations known today, the golden ratio is in question.
The relationship between the Fibonacci sequence and the golden ratio explains why it is important. The golden ratio reveals the mathematical truth in human life and nature. Therefore, its use in the financial market will not be wrong.
The price movements of all investment instruments depend on human behavior. Therefore, the use of this series of numbers in the financial world is not wrong. Making use of the Fibonacci sequence, trading decisions can be made.
Important support and resistance points on price charts can be determined with Fibonacci numbers. Up and down movements can be detected. Depending on these, buying and selling decisions can be made using this series of numbers.
Mathematically, this sequence of numbers can be calculated with this formula. The expression F(n) in the formula represents the nth Fibonacci number.
As n increases, the ratio of two consecutive Fibonacci numbers approaches 1.618 (the golden ratio), as can be calculated from this formula.
Usage of Fibonacci Sequence in Financial Markets
The Fibonacci sequence can give an idea about the price movements of assets in financial markets. It is said that it is possible for the price to inform what the next move might be after another price move.
Ratios generally used in technical analysis applications; 0.618, 0.500, and 0.382. In addition, the rates of 0.236 and 0.764 are sometimes used.
E.g; Let’s take a pair with a low of 1.1320 and a high of 1.2230.
Let’s subtract the low price from the high price. 1.2230 – 1.1320 = 0.091
If we multiply 0.091 by 0.618, we get 0.0562.
If we add the high price to the 0.0562 we found, we get 1.2792.
A value of 1.2792 indicates the level we expect the pair to rise to.
In short, people who invest in financial markets use this series of numbers to determine the trend.
The tools used by making use of the Fibonacci sequence are as follows:
Let’s consider a price that accelerates from a certain starting point and then completes it and returns. In this reversal, obstacles can often be encountered at the retracement points indicated by the Fibonacci ratios.
These levels can be detected through the Fibonacci Retracement between the lows and highs of the main trend that has completed its move.
An investment vehicle cannot move in a certain direction continuously and uninterruptedly. Even if there is a high acceleration, it is extremely possible to experience retreats and pauses in a certain time period. Here, Fibonacci ratios can be used to resolve these retracements.
Fibonacci Retracement can be applied in both an uptrend and a downtrend. It is drawn from the bottom to the top in an ascending trend, and from the top to the bottom in a downtrend.
Fibonacci Fan Lines
Another tool used in financial markets is called Fibonacci Fan lines. It is a tool that is not used as often as return lines.
These lines are notable for giving meaningful reference points about the progress of a particular trend. It is drawn between the bottom and the top when there is a trend with a certain direction. In this way, a clue can be obtained about the future of the trend related to the trend.
With this tool, it is also possible to reach meaningful regions about the retreat points. It can also be applied to charts with both an uptrend and a downtrend. It should be drawn from bottom to top on an ascending chart, and from top to bottom on a falling chart.
Fibonacci Time Zones
Another tool of the Fibonacci numbers is the time zones. The distribution of price movements over time tends to change direction or find significant movements in certain periods.
It is assumed that drastic movements in the price of a financial asset at any moment will create some repercussions in the future. It is also predicted that these reflections will manifest themselves in increasing time intervals.
Here is the processing of these time intervals on the chart, the tool called Fibonacci Time Zone serves to determine the time intervals.
In the trading platforms named MetaTrader, which are used in VIOP and forex market transactions, you can select this tool and ensure its automatic placement. When you select the tool and mark the first exit point, you will see parallel vertical lines.
The distance of parallel vertical lines in the horizontal plane is positioned by keeping the golden ratio to each other. The tool, which is placed between the bottom and the top of a price that has risen or fallen between any two points, automatically identifies the next time steps on the chart.
In this way, in the course of the graph, it is interpreted in which time period there are movements that can be considered important. According to technical analysis, every price movement is caused by a historical factor. With this in mind, it is accepted that the entire pricing history contains many interdependent events.
A move has the potential to affect the next price steps. Therefore, past and future time movements can be compared with the Fibonacci Time Zones tool.
SEE MORE: Forex Technical Analysis 101