Written by Robert McKinley

Mr. Fibonacci

First, I'll introduce you to the man who made-known the famous mathematical ratios that are so interesting and so widely applied. His original name was Leonardo di Pisa but for reasons I will not deal with here, he later became known as Leonardo Fibonacci. He was born in Pisa, Italy about 1175 AD. At some point, in his travels along the Mediterranean coast he realized that the “Hindu-Arabic” arithmetic system was superior to all others.

In time, he became a renowned mathematician and among many other things he introduced a series of numbers that became known as “Fibonacci Numbers.” This was not just some ordinary series of numbers; in fact, it was quite remarkable because within this series of numbers were ratios that have since been found in various objects throughout nature. For example, from the number of petals on a flower to the way spiral galaxies are constructed.

Whether he discovered them is not entirely clear and is not a matter of consequence to our lesson.

What is important is the series of numbers and the ratios within the numbers.

The Fibonacci series of numbers is easy to construct. It goes like this:

1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233 … etc. Notice that (with the exception of the first two numbers) each new number is the sum of the two preceding numbers. Also, beginning with number 34, each number is roughly 1.618 times the previous number and approximately 0.618 times the following number.

It is these ratios that are of interest to Forex traders. Again, beginning with number 34, when any number is divided by the next (higher) number we get a ratio of 0.618. Additionally, if we measure the ratio between alternate numbers we get 0.382.

Examples:

• 55 ÷ 89 = 0.618
• 55 ÷ 144 = 0.382

OK, any discussion of Fibonacci numbers and ratios can become much larger than is necessary for our purposes. So let’s just consider how these ratios can be applied to Forex trading.

In the next lesson I will show you why Fibonacci ratios are so important to serious Forex traders.

The next lesson is Fibonacci Retracements.