Who is Fibonacci and why is he famous? This post will give some answers.
Summary
Who is Fibonacci and why is he famous?How the Fibonacci sequence is used in trading.
Conclusions
Who is Fibonacci and why is he famous?
Leonardo Bonacci, Leonardo of Pisa, or Leonardo Bigollo Pisano, alias Fibonacci, was born in Pisa in 1175 and was interested in mathematics from a young age.
As he followed his merchant father to what is now Algeria, there he became acquainted with Arabic numerals.
With the publication of the book “Liber Abaci” or “Liber Abbaci” (1202), i.e. “The Book of Calculation”, we owe Fibonacci the introduction in Europe of the nine so-called “Indian” or “Arabic” digits and also the introduction of the digit “0" (whose adoption was initially opposed!).
Fibonacci is one of the most important mathematics and geometry scholars in history: we owe him the discovery of the “golden ratio”, i.e. the proportion used since ancient times to obtain a harmonic dimension of things (just think of the Pyramid of Cheops or the Parthenon of Athens) and which is also present in nature (just think of the shape of some shells).
But we traders know Fibonacci above all for his famous mathematical sequence in which each number is given by the sum of the previous two:
1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, etc.
Graphical representation of the Fibonacci sequence.
How the Fibonacci sequence is used in trading.
These are the two most common ways to use the Fibonacci sequence in trading.
1 - Many traders choose numbers from the Fibonacci sequence as periods for calculating technical indicators.
For example:
EMA(21), SMA(89), RSI(13), ATR(21), etc.
2 - Others use this sequence to identify possible support or resistance levels in financial instrument charts.
In this case, the numerical series is converted into percentages and the most used are 23.6%, 38.2%, 61.8%, 78.6%, and 100%.
This series can also be extended beyond 100%. The most common extensions are 138.2%, 161.8%, 261.8%, and 423.6%.
To trace these levels, I have to identify the extremes of the trend I intend to study, i.e. the minimum and maximum points.
If the trend is up I do the tracing starting from the minimum up to the maximum.
Fibonacci levels on USDJPY, daily timeframe, and data from IG (Source: MetaTrader 4 – screenshot by Author).
If the trend is bearish I do the tracing starting from the maximum and going down to the minimum.
Fibonacci levels on GBPCAD, daily timeframe, and data from IG (Source: MetaTrader 4 – screenshot by Author).
Conclusions
- Fibonacci is important for history and trading, too. As a trader or investor, you need to know him.
- As I am an algorithmic trader, I do not consider the Fibonacci sequence valid “a priori”, but, eventually, I test its values through automatic trading systems. I suggest you do the same!
A sincere wish of good work to all!
Written by F. GRAMOLA (*).
(*) Member of S.I.A.T., the Italian Society of Technical Analysis (member society of I.F.T.A. – International Federation of Technical Analysts).
Warning
We merely cite our personal opinions for educational purposes only.
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Investing and trading are risky. Don't invest or trade money that you cannot afford to lose.
Initial Photo by Giulia May on Unsplash.
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