Technical Analysis

# Why Successful Traders Use Fibonacci and the Golden Ratio

Support and resistance levels on bar charts are a major component in the study of technical analysis. Many traders, including myself, use support and resistance levels to identify entry and exit points when trading markets. When determining support and resistance levels on charts, one should not overlook the key Fibonacci percentage "retracement" levels. I will detail specific Fibonacci percentages in this feature, but first I think it’s important to examine how those numbers were derived, and by whom.

Leonardo Fibonacci da Pisa was a famous 13th century mathematician. He helped introduce European countries to the decimal system, including the positioning of zero as the first digit in the number scale. Fibonacci also discovered a number sequence called "the Fibonacci sequence." That sequence is as follows: 1,1,2,3,5,8,13,21,34 and so on to infinity. Adding the two previous numbers in the sequence comes up with the next number.

Importantly, after the first several numbers in the Fibonacci sequence, the ratio of any number to the next higher number is approximately .618, and the next lower number is 1.618. These two figures (.618 and 1.618) are known as the Golden Ratio or Golden Mean. Its proportions are pleasing to the human eyes and ears. It appears throughout biology, art, music and architecture. Here are just a few examples of shapes that are based on the Golden Ratio: playing cards, sunflowers, snail shells, the galaxies of outer space, hurricanes and even DNA molecules.

William Hoffer, in the Smithsonian Magazine, wrote in 1975: "The continual occurrence of Fibonacci numbers and the Golden Spiral in nature explain precisely why the proportion of .618034 to 1 is so pleasing in art. Man can see the image of life in art that is based on the Golden Mean."

I could provide more details about the Fibonacci sequence and the Golden Ratio and Golden Spiral, but space and time here will not permit. However, I do suggest you read the book "Elliott Wave Principle" by Frost and Prechter, published by John Wiley & Sons. Indeed, much of the basis of the Elliott Wave Principle is based upon Fibonacci numbers and the Golden Ratio.

Two Fibonacci technical percentage retracement levels that are most important in market analysis are 38.2% and 62.8%. Most market technicians will track a "retracement" of a price uptrend from its beginning to its most recent peak. Other important retracement percentages include 75%, 50% and 33%. For example, if a price trend starts at zero, peaks at 100, and then declines to 50, it would be a 50% retracement. The same levels can be applied to a market that is in a downtrend and then experiences an upside "correction."

The element I find most fascinating about Fibonacci numbers, the Golden Ratio and the Elliott Wave principle, as they are applied to technical analysis of markets–and the reason I am sharing this information with you–is that these principles are a reflection of human nature and human behavior.

The longer I am in this business and the more I study the behavior of markets, the more I realize human behavior patterns and market price movement patterns are deeply intertwined.

##### Jim Wyckoff

Jim Wyckoff is the editor of the "Jim Wyckoff on the Markets" analytical, educational and trading advisory service. He is also a technical a...

#### charliechan

##### Experienced member
isnt this title ironic!

damn - where is my protractor. im lost without it!!!

##### Well-known member
Nice article. Thank you.

#### G-Man

##### Active member
It seems the title of this article was 'Why Successful Traders Use Fibonacci and the Golden Ratio', and yet didn't provide any information as to why traders use these, just seeming to provide a brief introduction.

The whole fibonacci concept is so exceedingly complex when opened up, a single article would not be able to provide much useable information. If it was stated that successful traders use Fibonacci because other traders do, then it would have provided more information.

G-Man

#### AlexisD

##### Junior member
Are you kidding me? Fibo and Elliot...

#### jerrygrant

##### Newbie
How can the author do justice to a title like that in one page? Who restricted him to one page anyway? Was it the editor?

#### charliechan

##### Experienced member
jerrygrant said:
How can the author do justice to a title like that in one page? Who restricted him to one page anyway? Was it the editor?

lol - 1 page is far too much for this.

back of a stamp would be more appropriate.

fib/gann levels are good 4 1 thing only - fading cos all the suckers use em.

Lol Charlie

Too short.

#### crabbydog

##### Junior member
This is a topic covered in many places and I woudl expect all traders to be aware of them. To make an article like this useful it should produce some specifcsthat can be shown to enhance a traders trading.

#### nprince

##### Newbie
Doesn't provide any information on the application in trading

#### TWI

##### Senior member
I am sure a lot of unsuccessful traders use this method as well and if all you have read is that page I suggest you may fall into this category if you decide to start using it now.
In my experience only way to use it is for retracements when price is retreating from a well defined trend to provide additional levels of likely support/resistance.

#### fxmarkets

##### Established member
G-Man said:
It seems the title of this article was 'Why Successful Traders Use Fibonacci and the Golden Ratio', and yet didn't provide any information as to why traders use these.

G-Man
We have to assume that traders see or view images of lovely profits, using these ratio's. Does a fib set up please the eye?

#### aswilled

##### Newbie
The article was well written, however, it mainly focuses on the history of the Fib. when it should of focused on how to use a particular Fib for what kind of trade and why those levels are so important to retracements.