The Fibonacci Relevance: The series with divine ratios

By name Fibonacci seems so complex but what if I tell you that all your surroundings, your body, your planet on which u live, the whole galaxy is configured itself as per the series which was invented by a mad man named Leonardo Fibonacci in 1202 when he was observing rabbits breed. This series has find importance in many facets of nature till now.

The series is as follows: - 0, 1, 1, 2, 3, 5, 8, 13, 21, 34….and so on. What do we see? Each number in the series is the summation of the previous two numbers. For example 2= 1+1, 13= 8+5 etc.

Even the human anatomy is full of Fibonacci numbers or ratios. The core human body has five outlets (two hands, two legs and one head), and each outlet has five other outlets. For instance, the head and legs culminate in five, in turn, fingers (including thumb). The head has five ‘outlets’ in the form of two nostrils, two ears and one mouth.

I won’t say that occurrence of Fibonacci numbers are universal but there occurrence are large enough that cannot be ignored!

The ratio of each number to its succeeding number tends towards 0.618. The ratio of each number to its second succeeding number tends towards 0.382 and so on.

Here comes this magical series relevance in the magnificent industry of financial markets. Traders study chart and we know that market moves are very similar to moves of a crawling snake. Often market moves in trend’s (up: down) but as we study in books they are not exactly the same when we look at live markets.

Market retraces itself when we study it for a particular time frame. Even most of the times market bounce back at the levels defined by this series. Most common are 61.8, 50.0, 38.6, and 23.6.

Now it sounds good as now by analyzing market based on these levels we can predict when bulls will take the charge in falling market. It is like being god of the market. Isn’t it?

The Fibonacci levels are used by jobbers and scalpers at large scales to buy on dips in up-trend and sell on rallies in down-trend and we use the Fibonacci levels in pivot point analysis also.

There are more tools that can be seen in state of the art software’s of big boys (research companies) in financial market. We should use at least 3-4 of them as ultimately we want good decision to be made!

Road-map of combining different technical tools in trading:

Today, we are living in an age of internet. Knowledge from various sources is at our doorstep with few simple clicks. I believe mere availability of tremendous knowledge is not a need of time, we should select among them to reach our goal in short time as we say “Time is precious”.

There are lots of tools/indicators available today to carry out technical analysis on charts. Traders and researchers develop different type of tools day by day to lead in the quest. While approaching for new tools we forget the basic idea that by using those tools we just wanted to trace the psychology of markets.

We should choose among the available tools/indicators to come out with a sound result and low risk decision. We should follow a predefined methodology in deciding which tool to use at what time?

As per my experience and industry specific standards the process should involve following steps:-

Step 1- Define the basic trend of security

Step 2- Drawing trend lines with important support and resistance price levels for future reference.

Step 3- Incorporating short term, medium term and longer term moving averages on the price chart to help us get a better perspective of the price behavior.

Step 4- Determining price levels using the retracement theory.

Step 5- Adding indicators- to actually “tell” us what to do with the security, i.e. whether to buy or sell.

Playing in stock market is a game of probabilities; through analysis we tend to increase our probabilities of success. To arrive at the meaningful analysis we should combine different tools in a pipeline; one after another. Otherwise availability of different tools will only lead to confusion nothing less or more than that!