Discover How Fibonacci Trading Works

By Author: David Rivera
Total Articles: 17
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It is not always easy to understand the ins and outs of the financial market. This is especially true when the understanding and application of complex analytical methods becomes involved. Fibonacci Trading is such a technique that is used to analyze and predict financial markets. This technique is based on the sequence with the same name.

A man named Leonardo of Pisa, who was better known as Fibonacci, first introduced the sequence to Western Europe in a book named Liber Abaci. It is a pattern of numbers that usually start with zero and one. The next number in the sequence is always the sum of the previous two numbers. Thus, if the previous digits were three and five, the next digit will be eight.

Thereafter, five plus eight (previous two digits) equals thirteen - meaning the next digit is thirteen. Eight plus thirteen (previous numbers) equals twenty-one meaning the next number is twenty-one. The sequence starts like this: zero, one, one, two, three, five, eight, thirteen, twenty-one and continues. Although the theory was released during the first decade of the thirteenth century, it only became known as the ...
... Fibonacci sequence during the nineteenth century.

It was linked to the world of financial trading by a man named Ralph Elliot. He developed a model called the Elliot Wave principle that suggests combined investor psychology moves in natural rhythms. In other words, collective buying and selling takes place according to natural patterns. These patterns alternate between optimistic (upwards) and pessimistic (downwards) waves.

Elliot said that five waves (three optimistic and two pessimistic) are followed by three (two pessimistic and one optimistic). The pattern, slightly more complex, then repeats itself. Only after Elliot developed his theory, did he realize that it is based upon Leonardo of Pisa's theorem.

In essence, Elliot provides a framework (based on Leonardo's pattern) that shows whether selling or buying will result in a gain or loss. This framework looks at previous waves (prices) and predicts whether the next wave (and how many of them) will be upwards or downwards. After his death, the theory was introduced to Wall Street with the support of many researchers.

Certain economists even likened the contribution to that of Charles Dow's. However, not everyone agrees with the theorem and some financial professors are against it. Critics say Fibonacci Trading is not based on sound scientific evidence and stays an uncertain method. Those for it, however, continue to maintain that it occurs so many times in financial markets for it to be random.

The author of this article has expertise in Gann Trading. The articles on Fibonacci Trading reveals the author’s knowledge on the same. The author has written many articles on Fibonacci and Gann Trading as well.