Fibonacci Numbers - Rob Booker

Fibonacci
Part I
By Rob Booker
© 2004 W. R. Booker II. Forever rights reserved and ever All. And ever.
The information contained in this ebook involves math. Sorry.

Fibonacci Part I – page 2
Fibonacci Numbers: Part 1
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The use of Fibonacci numbers in your trading can be a powerful asset.
For most traders, the meaning of these numbers, and their use, are either
misunderstood or left unused. This is a shame. You’re going to add the
power of these numbers to your toolbox – and you should start by getting a
good background in these numbers.
Leonardo Pisano (or “Fibonacci”, as he is now called) discovered a
mathematical sequence of numbers with predictive value throughout
nature. Fib numbers start with 0 + 1 and then progress by adding the last
two numbers in the sequence as follows:
0 + 1 = 1 1 + 1 = 2
So 1 and 2 are two of the first Fib numbers (0 is also a Fib number).
Continuing down the line by adding the last two numbers in sequence
leads to the following line of numbers:

Fibonacci Part I – page 3
1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144
And so on. The numbers themselves, although fascinating to study in
nature (just look up Fibonacci on Yahoo! or Google), really get interesting
in forex charting when you start talking about their ratios.
A prominent ratio develops from these numbers, simply by taking the
ratio of two successive numbers and then dividing each by the number
before it. This ratio is, roughly:
62%
The other ratios that develop, and that are important for the purpose of
charting, are 38% and 50%.
It’s important here not to complicate the issue. There is a ton of
mathematics backing this up, with long histories of the numbers, of
Fibonacci himself, of applications in nature, etc. There are even charting
packages and signal providers that base everything they do on Fib numbers
and ratios. But instead of complicating the issue, I want to leave it right
here. Just remember that there are a few very important ratios that arise
from Fib numbers, and that you can use those ratios to predict price
movement, especially on pullbacks, but also on trends.
Here are some readings on Fib numbers if you want a more
comprehensive (and complex) background:
http://www.mcs.surrey.ac.uk/Personal/R.Knott/Fibonacci/fibnat.html#golden
http://www.moneytec.com/forums/_showthread/_s-
55be7400a99aaa355dc59542adcb50eb/_threadid-2459
The power of using Fibonacci numbers in charting is best realized on
strategies that concentrate exits and entries based on price pullbacks.
This is because you can use Fib tools to not only ascertain good entry
points, but exit points – because Fib analysis can be one of the more
accurate methods of determining price projections.
Do you have to use them? No. Tomorrow’s lesson will cover how to
draw them, and how to use them – and then it’s up to you. I’d say that 50%

Fibonacci Part I – page 4
of the traders I work with use them for some part of their daily analysis
and study.