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Fibonacci Numbers



Have you ever heard of Leonardo Fibonacci?

No, he didn't paint the Mona Lisa. And he's not the guy behind the counter at Vinnie's Pizza.

Fibonacci was a well-known Italian mathematician who lived from around 1175-1250. He made great contributions to the world of mathematics, including introducing the decimal system to Europe.

He also studied a sequence of numbers that has since become known as the Fibonacci Numbers, or the Fibonacci Sequence.

The Fibonacci Sequence start with a 0 and a 1, and each new number is the sum of the two previous numbers (0 + 1 = 2, 1 + 2 = 3, 3 + 2 = 5). The first numbers in the sequence are as follows:

0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144...and so forth into infinity.

Fibonacci found that these series of numbers and their ratios to one another were prevalent throughout nature and can in fact be seen all around you.

Ok, ok, so what does this have to do with forex trading?

Well, quite a bit in fact. You see the ratios that are found in the Fibonacci numbers can be seen in the price movement of currencies (as well as stocks and other investments).

Without boring you any further, I'll give you the big 3 numbers that you should remember: 0.382, 0.500, and 0.618. There are others, but these are the most significant.

These numbers are used to calculate "retracement levels", which are used by many traders to determine when to place buy and sell orders. Here's how it works:

Assume the price of a currency pair (or a company's stock for that matter) is trending upward. History shows us that prices tend to hit a peak, go into a temporary reversal, and then resume the trend. The reversal is where Fibonacci numbers come in.

The price of a currency that is trending can be expected to reverse back to one of the Fibonacci numbers and then bounce back to continue the trend. If you forecast this correctly you can buy in just before the upward trend continues and score big profits.

The online trading platform you use should be able to chart the Fibonacci numbers for you. You just draw a line from a low point to a high point, and the retracement levels are automatically mapped on the chart for you.

Of course, its not quite as simple as trading when the price hits a Fibonacci number. There are other things to consider:

You don't know which retracement level the price will stop at. If you choose .382 and it drops to .618 you could lose a ton of pips.

Similarly, if you choose the wrong low/high points, the retracement levels will be all out of whack.

And quite frankly, as accurate as they can be at times, sometimes Fibonacci numbers just don't work at all. There are many variables at play in the forex market. You can't rely solely on one method to predict price movement.


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Recent Forex News

Technical Analysis

GBPUSD: Bearishness Remains Dominant
Outlook for the pair continues to point to the downside after bear pressure pushed GBP further lower the past week. This is coming on the back of its previous week losses and has now opened up further downside risk towards the 1.5326 level, its Aug 31'10 low. On a turn
EURUSD: Set For More Gains
Having closed strongly higher on the back of previous week strength, further bullish threats are now likely as we enter a new week. This technical development should call for more strength towards its Aug 18'10 high at 1.2921 with a violation there targeting the 1.3332 level. A break will resume
USDCAD: Collapses, Halts Upside Offensive
USDCAD: The pair ended the week lower after an attempt on the upside failed the past week and pushed USDCAD to a low of 1.0384 on Friday. With that said, we think a follow through lower should see the pair weakening further towards the 1.0246 level, its Aug 19’10 low
Weekly Technical Update: Greenback Weakened Post Non-Farm Payroll
The USD was in consolidation/ correction mode this week ahead of the NFP. This is in a sense the market's way of paring some overextended USD gains, but also offers a chance for the market to continue with greenback strength. There was some dollar strength immediately after the release, but
USDJPY: Retains Its Broader Downside Bias
USDJPY: The pair continues to retain its broader downside bias as it looks to recapture its YTD low at 83.58 despite its price hesitation. A breach of there will open the door for more downside towards the 82.00 level, its psycho level with a cut through there aiming at the 81.00 level.

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Fundamental Analysis

Dollar Index Falls to Support on Better Job Data
The dollar, while rising against the yen and Swiss franc, fell versus other key counterparts after better-thanexpected US employment data eased concern of a double-dip recession. For the week, all the major crosses except sterling rose against the greenback. Private-sector payrolls grew more than expected in August and job losses
Weekly Economic and Financial Commentary
For a generation of Americans brought up on action heroes who face impossible challenges and then win the day, the results of fiscal and monetary stimulus are disappointing. Yet, the level of pessimism and talk of a double-dip strike us as too much of a bad thing. This week we
The Weekly Bottom Line
We had some fairly positive data this week, starting with expansions in both personal income and consumption for the month of July. Then the Conference Board's consumer confidence index surprised market expectations on the upside and the ISM manufacturing index also fared better than expected underpinned by a surprisingly strong
Risk Rebounds on Improving Global Data
The past week began with disappointment stemming from Japan's lack of direct currency intervention and risk aversion looked probable to continue into the week. This was not the case as better than expected Australian 2Q GDP started a ripple effect culminating into a global wave of positive data surprises. Upbeat
Is this an Audacious Obama Hope Rally?
The strong rally in risk into today's close in the US today can't be about this week's economic data particularly as the ISM non-manufacturing index for August showed a steep deceleration. So why the rally? The combination of an equity rally and a lousy ISM resulted in the predictable

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