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Fibonacci numbers are used to create technical indicators using a mathematical sequence developed by the Italian mathematician, commonly referred to as “Fibonacci,” in the 13th century. The sequence of numbers, starting with zero and one, is created by adding the previous two numbers. For example, the early part of the sequence is 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89,144, 233, 377, and so on.
This sequence can then be broken down into ratios which some believe provide clues as to where a given financial market will move to.
The Fibonacci sequence is significant because of the so-called golden ratio of 1.618, or its inverse 0.618. In the Fibonacci sequence, any given number is approximately 1.618 times the preceding number, ignoring the first few numbers. Each number is also 0.618 of the number to the right of it, again ignoring the first few numbers in the sequence. The golden ratio is ubiquitous in nature where it describes everything from the number of veins in a leaf to the magnetic resonance of spins in cobalt niobate crystals.
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Application in Trading
Through many readings and years of scratching away at various strategies, it wasn’t until the time I spent with Steve Bobbit and Jeff Manson that I was able to put together a strategy that I connected with, through understanding and a discipline that I needed to have in place for trading. While I am knowingly confident that the bigger players in the market are not sitting with charts and figuring out Fibonacci retracements and projections or for that matter the thousand other technical indicators that we use to make use feel better, the natural order of Fibonacci in the universe and when applied to the hundreds of stock charts I have observed, was a technical entry into the marketplace I was seeking.
There are plenty of strategies based on the Fibonacci patterns that can be as complex as you want utilizing Elliot waves and Gartley patterns to as simple as an A-B-C setup for entry and exit. It was the A-B-C projection setup that captured my interest when combined with the Fibonacci retracement for intraday trading. This technique in its simplest form can be used alone or in combination with any other indicator of choice.
I hope I have peaked your interest as I to was keen on delving more into the the natural order of numbers. I would encourage you to simply start with any chart, and start drawing A-B-C legs and see what possibility may lead you to developing a trading plan.
It was this strategy that laid a foundation to implement the S3/T3 strategy in combination with MML levels over the years utilizing Heikin Ashi candles as my trend candle of choice.