Why Fibonacci

The Fibonacci sequence begins 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987... 


nlike indicators (which are typically calculated values based on a range of prices that have occurred in the recent past) Fibonacci levels can be used to isolate and identify trade entries, exits, and trend failures based on patterns in the market.  These price patterns have existed for as long as there have been markets.  Furthermore, these patterns can be seen on every timeframe making them fractal in nature.

You may be wondering how price levels based on Fibonacci numbers describe patterns in the market.  As it turns out, the Fibonacci sequence has an interesting property:  The ratio of the last two numbers (as the numbers get larger) gets closer and closer to an irrational number known as Phi.  Phi shows up in many, many places.  Also known as the 'Golden Ratio', it occurs in art, in nature, in music, and (as it turns out)  in the price action of highly liquid markets.

Nature always strives to find the most efficient solution to a problem.  Whether it's the number of petals on a flower, the orientation of seeds in a pine cone, or the price action of a contract (which is the result of a nearly infinite set of actions by large numbers of traders), the number Phi describes what we observe.

The simple fact is that price action in highly liquid, efficient markets can be described with the Golden Ratio.  Take a few minutes to watch the video here which investigates some of the interesting properties of Phi.