Fibonacci Series is another example of a mathematical concept being applied to forex with remarkable results. The series is simply a sequence of numbers where each number is the sum of the previous two (0,1,1,2,3,5,8,13…). This pattern, and the related ratios between the numbers are studied by mathematicians for their own purposes, and they bear relevance to many practical problems of physics, biology, and their sub-branches.
There are a lot of ways in which the Series can be utilized in forex trading, the most common of which is the retracement method where each successive retracement of a price movement is expected to correspond to the ratio between Fibonacci numbers. For example, when the first leg of a trend makes takes the quote of the EURUSD pair from 1 to 2, the Fibonacci retracement method leads us to expect that the size of the retracement of this move will equate to the size of this main movement multiplied by one of the Fibonacci ratios. In our case that would be (2-1) x 0. 38, or 0.61. By contrast, the Fibonacci extension method calculates the size of next leg of a trend. In our current example, we could have calculated the Fibonacci retracement, and added it to the main movement in order to reach at the target value for extension.
Traders have noted for a long time that the golden ratio existing between Fibonacci numbers, and their inverses, are often very useful for evaluating the development of a trend and its various corrections. The Fibonacci Series often presents a very precise and clear indication of where the prices will go if a certain pattern is realized. On the other hand, it can and does fail frequently, so traders need to be careful while applying it. The indicators are offered by the vast majority of forex brokers, and it is possible to practice their use with a demo account in the comfort of a risk free environment.
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