What is Fibonacci Analysis?
The Fibonacci analysis gives ratios which play important role in the forecasting of market movements. This theory is named after Leonardo Fibonacci of Pisa, an Italian mathematician of the late twelfth and early thirteenth centuries He introduced an additive numerical series – Fibonacci sequence.
The Fibonacci sequence consists of the following series of numbers: 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987, 1597, 2584, 4181, (etc.), which exhibit several remarkable relationships, in particular the ratio of any term in the series to the next higher term. This ratio tends asymptotically to 0.618 (the Fibonacci ratio). In addition, the ratio of any term to the next lower term in the sequence tends asymptotically to 1.618, which is the inverse of 0.618. Similarly, constant ratios exist between numbers two terms.
Golden spirals appear in a variety of natural objects, from seashells to hurricanes to galaxies.
The financial markets exhibit Fibonacci proportions in a number of ways, particularly it constitutes a tool for calculating price targets and placing stops.
For example, if a correction is expected to retrace 61.8 percent of the preceding impulse wave, an investor might place a stop slightly below that level. This will ensure that if the correction is a larger degree of the trend than expected, the investor will not be exposed to excessive losses.
On the other hand, if the correction ends near the target level, this outcome will increase the probability that the investor’s preferred price move interpretation is accurate.