If your background is somewhere related to mathematics, then you must be aware of the Fibonacci series. In fact, students are taught this series in their schools. So, what exactly is this Fibonacci series?
Fibonacci series is a sequence of numbers in which the next number is generated by adding the last two numbers. Discovered by an Italian mathematician Leonardo Fibonacci, this sequence is infinite and looks like this:
(0, 1, 2, 3, 5, 8, 13, 21, 34…….)
The starting point of Fibonacci series is 0 and then 1 and the next number is generated by adding the preceding two numbers which is 0+1 = 2. The fourth number is the sum of second (1) and third number (2) i.e. 3. The fifth number is the sum of third (2) and fourth (3) number i.e. 5. And so on…
Fibonacci sequence is a breeding ground for many experiments, especially in the field of mathematics and sub-atomic world. This sequence is broadly used in the forex world to check various range and trend patterns. Even the petals of a flower are arranged according to Fibonacci!
The Rule of Ratio in Fibonacci
It is not the numbers of the series that is useful in determining the resistance levels, extension of trades and retracement levels. Instead, the analysis is made easier by calculating the ratio between the two numbers. For example 13/21 is 0.62, 1/2 is 0.5, etc.
Now, suppose we take a ratio of 13/21 which is 0.62. Upon subtracting this number from one, we will get 0.38 which is the ratio of another two numbers in the series, but at the same time either one of the numbers, 13 or 21, falls between the other two numbers. In this case, 13 falls between 8 and 21 with a ratio of 0.38. Also, 21 falls between 13 and 34 with a ratio of 0.38.
Let me show you one more magic of Fibonacci sequence:
When you divide the numbers in the series starting from two, you will get approximately the same figure:
2/3 = 3/5 = 5/8 = 8/13 = 0.62 (approximate)
As the series progresses, the ratio approaches to the golden ratio which is 0.6180339887.
Also, 1/3 = 2/5 = 3/8 = 5/13 = 0.38. Remember, we talked about subtracting the above ratio from number one?