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 is the editor of the "Jim Wyckoff on the Markets" analytical, educational and trading advisory service. He is also a technical analyst for Dow Jones Newswires, and was formerly the head equities analyst at CapitalistEdge.com.Jim has spent over 20 years involved with the stock, financial and commodity futures markets. He was a financial journalist with the FWN newswire service for many years, including stints as a reporter on the rough-and-tumble commodity futures trading floors in Chicago and New York. As a journalist, Jim covered every futures market traded in the U.S., at one time or another. It didn't him long to realize the successful traders in every market-be it pork bellies, Treasury bonds or stock index futures-had a common thread among them: nearly all relied on technical analysis to give them a trading edge.Not long after Jim started his career in financial journalism, he began studying technical analysis and found it fascinating. By studying chart patterns and other technical indicators, he realized the playing field could be leveled between the "professional insiders" in the markets. His work has been focused on achieving that end ever since.Jim considers himself a "straight-shooter" in the challenging endeavor of futures trading. Like achieving success in any profession, being a successful trader requires hard work, experience and continuing education. There are no short-cuts to easy money. And, Jim promises and provides excellent customer service, including picking up the telephone, himself, when his valued customers ring him.  Feel free to give him a call at +1-319-277-8643

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

G-Man

Active member
243 3
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
 

jerrygrant

Newbie
3 0
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
1,008 119
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.
 

crabbydog

Junior member
35 1
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.
 

TWI

Senior member
2,527 252
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
834 50
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?