Fibonacci Numbers and The Stock Market

I am not a fan of trading indicators, which I find useless most of the time. I think that the price tells us all we need to know.

I do not really understand why people keep using four of five indicators for their trading decisions.

Trading Fibonacci Numbers

However, I think that one of the most interesting indicators is Fibonacci and the Golden Number.

The interesting fact about this indicator is that this indicator seems to be related to how things were “created” in the material Universe.

This ratio can be used to describe the proportions of most things we know: from Atoms to celestial bodies. And, the world of trading is not unfamiliar with this.

fibonnaci trading

Fibonacci was an Italian mathematician that spread through Europe the Indian-Arabic decimal number system and the null digit: the zero.

Likewise, he introduced the famous Fibonacci sequence, although this concept was obviously already known from very ancient times. Fibonacci just learnt it during his travels through the Orient.

The famous Fibonacci number series is the result of adding the two previous number of a series that starts from 0 or 1: (0), 1, 1, 2, 3, 5, 8, 13, et cetera.

The importance of this series lies, nonetheless, in the ratio obtained by dividing any number by its predecessor. The result is 1.618 or 0.618 if seen conversely.

This number is known as the golden number, PHI, or divine proportion, and is the ratio that appears in the majority of structures of nature and man, including the Gizah Great Pyramid. So, this ratio is not a joke. It can also be found in plants and our body.

For instance, if we measure the distance from our shoulders to our fingers and divide it by the distance from our elbow to the fingers, we find the golden number.

We also find that proportion in other parts of our body.

 

Golden ratio trading

 

Trading Fibonacci system?

Then, should not such an important ratio be of use in trading?

Well, we should already know that there is not a magic solution for trading, and no indicator will give us the door to riches. Nevertheless, given the importance of this ratio, it is possible that it could be helpful for someone who studied it deeply.

The most common way of use for this indicator in technical analysis is the result of three numbers: 38.2%, 50% and 61.8%. However, it does not mean that there are other interesting percentages.

The most known way of using these percentages are by studying the pullbacks, when we try to measure support and resistance. When we measure a trend we have a starting point and an ending point. That move is a 100% one.

Trading Fibonacci retracements

So when a retracement occurs in that trend we could use those previous percentages to see if the retracement reaches them.

The probability for that to occur seems to be significant.

For instance, if we look at the long-term chart of silver from April 2012 to November 2014, we could easily see how this ratio works.

The maximum point was in 2012 when silver quoted $35. The minimum when it quoted $18 in 2013.

Well, if we apply the 61.8% from the maximum or 38.2% (100-61.8) from the minimum we would get to $24.7, the point where the retracement took resistance. Those approximately $25 was a good entrance point to be short (again) silver.

Notice that I am using the weekly chart for this.

I think that the long-term charts work better with this or any indicator. I do not think that five minutes intra-day charts will be useful for this, though a study should be considered.

 

fibonnaci commodities

 

There are other ways of using this Fibonacci indicator, like using arcs as if we were drawing with a compass. We could also use diagonal lines or time zones to measure a chart, like dividing it by areas following the Fibonacci series.

I do not have experience with this indicator and I do not use it. If it has success, I do not know.

There are a lot of people who talk good things about it, and people who say it is useless.

Anyhow, when you have experience there is no need of any indicator to see when a resistance or support is being formed. However, it could be possible that this indicator has some use for long-term charts.

Fibonacci series in day trading

When it comes to day trading, I doubt that this ratio will be useful for traders trying to beat the market makers in the long run (actually I think this ratio could be more useful for market makers). Neither, I think that other indicator will give the traders the edge they need to master intra-day trading.

I do not know if Fibonacci gives and edge in short term speculation. Maybe it does, but I leave it for others to study it

 

Thanks for reading and sharing.