Leonardo of Pisa known as “Fibonacci” was born in Italy around the year 1170. His book “Liber Abaci” published in 1202, not only introduced the Arabic numerals to Europe, but also found a series of mystical numbers that were based on the construction of the universe. These numbers were later known as the Fibonacci sequence. In mathematical terms the first Fibonacci numbers are 0 and 1, each subsequent number is the sum of the previous two, that is, 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233…
Golden number
Fibonacci began to analyze these series of numbers and found many mysterious and intriguing characteristics. One of the most fascinating and strange properties of the number, which has cosmic implications, is that if one divides a Fibonacci number by its successor, the result is always very close to 0.618 and the higher the numbers in the sequence, The nearest is the result of this division to 0.618. This magic number is called the golden number, golden number, golden ratio, golden ratio, golden ratio, divine ratio, golden ratio, golden spiral, PHI or the golden rule. The ancient Greeks were aware of this number and called it the golden average.
This number (0.618) is found everywhere and has fascinated mankind for thousands of years. For example, it is the mathematical basis for the construction of the Parthenon, the sunflowers, conches of snails, the Great Pyramid of Giza and many other famous constructions. In fact the golden ratio is the most pleasing shape in the universe to the human eye, be it rectangular or spiral.
Application to technical analysis
As might be expected, attempts have been made to apply the Fibonacci series to the stock market. One of the pioneers is RN Elliot, who argued that the rise and fall of society is not a random movement, but takes three steps forward and two steps back. He maintained that this sequence was mimicked by the exquisite precision of market flows.
Price trends are sometimes pronounced, but not infinite, that is, at some point prices correct and this is due to various factors. If we talk about speculative investors, a good level of profits satisfies them and they decide to exit the market to make the profit obtained liquid. If these movements are important they will make the price correct, regardless of whether the trend is bullish or bearish.
Magnitude of setbacks
Upon confirmation of a decline in the price, we will seek to calculate the probable magnitude of the movement. To achieve this, certain percentages obtained from the Fibonacci series are applied to the total magnitude of the previous trend. The percentages used are the following:
- 61.8%: Also known as the golden number, it is the limit of the quotient obtained from dividing one element of the Fibonacci series by the next, as the series tends to infinity. 50.0%: It is the most commonly accepted retracement, equivalent at the half of the advance of the main trend. 38.2%: It is obtained by subtracting 61.8% from the unit (1.000–0.618 = 0.382). 100.0%: Equivalent to the total magnitude of the main trend.
Through this method we can establish the possible rebound levels for the crossing, that is, how far the correction in assets can go.
Like other technical analysis tools, what this indicator tries to generate is a “mapping” of the stock prices to help the specialist or investor to establish entry or exit points, and it has its argument that it is widely followed by agents, which which ultimately gives it a validity that is framed in behavioral finance rather than a pure fundamental argument.
Considerations
- The percentages of retracement should be calculated only after the end of a trend has been confirmed, never while the trend continues. Some books mention a critical zone of 33 to 38.2%, and of 61.8 to 67%, instead of the The most important criticisms against Fibonacci retracements are grounded in random walk theory, arguing that there is no justification for assuming that price action has any reason to respect predetermined retracement levels. they form an important part of Elliot's Wave Theory.
References
- Cadiñanos, JE (2017). Advanced Trading Manual. ADMIRAL MARKETS. Retrieved from http://admiralfiles.s3.amazonaws.com/books/es/Manual%20de%20trading%20avanzado-2.pdf on May 24, 2019 at 3:13 p.m. Soto, D. (2014). Fibonacci: The Magic Sequence. TRADERS '. Retrieved from https://www.traders-mag.es/ebook/Chile/04/files/assets/common/downloads/ForexChile_04.pdf on May 26, 2019 at 4:28 p.m. Walker, W. (2019). ADVANCED TECHNICAL ANALYSIS FOR FOREX. WAYNE WALKER.
