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The Fibonacci sequence

The Fibonacci sequence

5 min reading

Another well-known tool of technical analysis is the Fibonacci sequence. Keep reading to know everything about it.

Fibonacci

The Fibonacci sequence

Another well-known tool for successful work that traders use is called the Fibonacci sequence. To date, the idea of Fibonacci sequence theory has gained widespread recognition among technical analysts and has been the subject of numerous studies. It got its name thanks to the 12th-century European mathematician Leonardo of Pisa, better known by the pseudonym Fibonacci. Fibonacci, among other numerous mathematical problems, explored and described this sequence in detail in his work “Liber Abaci”. 

What is it?

A Fibonacci sequence is a numerical series in which each successive term is the sum of the previous two. For example: 1,1,2,3,5,8,13,21,34,55,89,… These numbers are related by several interesting relationships: each number is approximately 1,618 times larger than the previous one. The number 1,618 is called the Golden Number or the Golden Section.

How is the Fibonacci sequence used in trading?

This remarkable property of the Fibonacci sequence is reflected in some of the technical tools used in market analysis, as well as on our bit4you platform. The general principle of interpretation of these tools is that when approaching the price of the lines built with them, you should expect changes in the current trend.Several basic levels are most often used in market analysis: 0.0%, 23.6%, 38.2%, 50.0%, 61.8%, 76.4%, 100.0%, 161.8%, 261.8% and 423.6%, the most active of which are 61.8% and 161.8%. The so-called support and resistance levels are powerful tools that should be available to any beginner or an experienced trader. By using Fibonacci Patterns on our platform, you can predict in which direction the market will move.

Most often, to assess the market situation, you can use the grid of Fibonacci levels. It can be made based on the minimum (0%) and maximum (100%) price value. Between these data stretches a grid on which Fibonacci levels are allocated. To properly build Fibonacci devices, it is necessary to correctly choose the main peaks of the schedule: minimum and maximum. Fibonacci levels are located between keys, not randomly selected points. And it is necessary to start from the previous, instead of the further movement. For example, if the price increases, it means that the Fibonacci grid should settle down on the previous descending trajectory. We must always move and analyze from the past to the future, not the other way around. 

Thanks to Fibonacci levels, everyone can analyze the rise and fall of asset prices. From the very beginning with their help, you can calculate the levels of support and resistance, as well as approximately determine the scale of the change in the direction of the trend. The price reflected in Fibonacci levels moves according to calculations. For example, if you notice that the price of assets is approaching the level of Fibonacci, then most likely you can predict its reversal. Іn order to trade successfully at Fibonacci levels, it is necessary to capture as much time as possible in the survey, then you will get more meaningful and effective data.

Formula

A sequence of Fibonacci numbers is defined by the formula Fn = Fn-1 + Fn-2. That is, the next number is obtained as the sum of the previous two numbers.

The first two numbers are 1, then 2(1+1), then 3(1+2), 5(2+3) and so on: 1, 1, 2, 3, 5, 8, 13, 21….

Conclusions