The Shocking Truth About Fibonacci Numbers

What Are Fibonacci Numbers?

For the uninitiated who are unfamiliar with Fibonacci numbers, they are a
sequence of numbers (a series, in math parlance) initially discovered by an 11
th
century Italian mathematician. The sequence starts with the digits 0 and 1, then
progresses to the next number by adding the last two numbers in the series together.
Hence, the sum of 0 and 1 is 1then 1 + 1 =2, 2 + 1 =3, 3 + 2=5, 5 +3 =8, 8 + 5 =13,
and so on.thus the first several numbers in the series are 0, 1, 2, 3, 5, 8, 13, 21, 34,
55, 89, 144, 233, 377, 610, 987, 1597.
Why Are Fibonacci Numbers Special?
It is commonly thought and has been widely written about that the numbers
in the Fibonacci series occur and are manifested throughout nature, art,
architecture, financial markets, and many other areas.
Is There Any Special Relationship Between the Numbers?
Any given number in the series (after 5) approximates 1.618 times the
number preceding it. The higher the number, the closer it approximates this ratio.
Any given number approximates .618 of the number following. Between alternate
numbers, the second higher number approximates 2.618 times the first number
(e.g., 233 versus 89). Between alternate numbers, the second number down has the
ratio of .382 (the inverse of 2.618) to the first number (e.g., 55 versus 144). There are
many other relationships such as these which are consistent between the numbers.
Where Can I Learn More About Fibonacci Numbers?
Traders Press publishes a short booklet, authored by yours truly way back in
1984, titled Understanding Fibonacci Numbers which furnishes much more
information about Fibonacci numbers, interesting facts about them, how they may
be used in trading, and a bibliography listing other sources of information. This
booklet is available on www.traderspress.com for a nominal price, and is available
only as an e-book at present.
How Do Traders Use Fibonacci in the Markets?
When a stock, commodity or index makes a price move (either up or down)
from point A to point B, then the price reacts part of the distance traveled in the A-
B move, the extent of this reaction frequently approximates a Fibonacci ratio of the
distance of the preceding move (e.g. .382 or .618). This is known as a Fibonacci
retracement, and the ending point of the reaction is labeled point C. If the original
trend reasserts itself, the distance traveled from point C to the point where this new
price move culminates at point D (the C-D move) frequently approximates a
Fibonacci proportion or ratio (e.g. C-D distance = 1.618 x A-B distance). This is
known as a Fibonacci extension. This is an extremely simplified and incomplete
explanation and example and is shown only to illustrate the types of principles used
by traders who employ Fibonacci concepts in their timing and analysis.
But How About the Numbers Themselves?
There has been much written about using the numbers themselves in the
markets. For example, if a price low occurs at point A, a subsequent high is
supposed to occur 34, 55, 89, or 144 price bars later. The actual numbers
themselves are purported to have great significance in many ways. Many who have
written about them almost imbue them with magical properties and qualities.
Indeed, when one Googles the terms magic and Fibonacci numbers together,
almost THIRTY THOUSAND entries pop up!
I Used to Believe That The Numbers Were Magic Myself
When I first learned about Fibonacci numbers (and relationships) in the
early 1980s, I was intrigued. I spent years observing how consistently Fibonacci
relationships and ratios played out in market action. In 1979, I had written and
self-published a book titled TheTradingRuleThat Can MakeYou Rich* (before I
had ever learned about Fibonacci numbers and relationships). This book dealt with
a highly consistent pattern of market behavior. When the book was reprinted in
1985, I added a chapter which dealt with Fibonacci relationships and how they
correlated with the main concept dealt with in the book. (Check this book out on
www.traderspress.com many traders say they have found it helpful in their
trading). Influenced by the popular wisdom, I became thoroughly convinced that
Fibonacci numbers themselves were a big deal and held magical powers.
What Changed Your Mind?
One day, years ago, I received an e-mail from my old friend Greg Morris.
Upon reflecting on what it said and checking it out myself, I was shocked!
Essentially, it said that there is no real significance to the actual Fibonacci numbers
themselves, but only to the ratios and relationships of .382, .618, 1.618, and so on.
Years later, Greg wrote briefly about what he told me in that e-mail in his excellent
book The Complete Guide to Market Breadth I ndicators (available on
www.traderspress.com )but I do NOT believe what he had to say is common
knowledge.hence this little tongue-in-cheek treatise which has been rattling
around in my head ever since Greg made me aware of the fact that FIBONACCI
NUMBERS THEMSELVES ARE NOT MAGIC.what is important is the
relationships between them, not the numbers themselves. What I discovered from
my friend Greg is that THE SAME FIBONACCI RELATIONSHIPS exist
between the numbers in ANY NUMBER SERIES constructed in the same manner
as the Fibonacci series, that is, by adding the last two numbers in the series to obtain
the next number! To me, this was in incredible revelation.so I quickly set to work
on a spreadsheet to prove this point to myself.
Lets Start the Series With 2 and 19
Greg suggested starting the series with the numbers 2 and 19 rather than 0
and 1. I did so and was amazed at the results.after getting a few numbers into the
calculations, it became apparent that the exact same relationships existed between
the numbers thus obtained as existed between the numbers in the Fibonacci series. I
decided to see what would happen if the series were started with random numbers,
even where the first or second one was a negative numberwell lo and behold, the
results were exactly the same: NO MATTER WHAT TWO NUMBERS, POSITIVE
OR NEGATIVE, WERE USED TO START THE SERIES, THE RESULT WAS
ALWAYS THE SAME.THE SO CALLED FIBONACCI RELATIONSHIPS
EXISTED BETWEEN THE RANDOMLY CHOSEN NUMBERS!! Even using two
negative numbers to begin the series gave the same result. See the Excel spreadsheet
below (Wheres the Beef?) if you dont believe it!
Gregs Wonderful Sense of Humor
I love my friend Gregs dry sense of humorwhen I asked him why he
had chosen the numbers 2 and 19 to illustrate his point, he told me to reflect on
what the 2
nd
and 19
th
letters of the alphabet were. Well, they are B and
S.B.S. Apparently this is what he thought of the magic of Fibonacci
numbers themselves, as opposed to the relationships between them.
Wheres the Beef?
This Excel spreadsheet quickly illustrates the pointcheck it out yourself!
Where's The Beef?
Fibonacci # Ratio Start Ratio Start Ratio Start Ratio Start Ratio
1 2 29 -15 -11
1 19 5 -32 7
2 21 34 -47 -4
3 1.500 40 1.905 39 1.147 -79 1.681 3 -0.750
5 1.667 61 1.525 73 1.872 -126 1.595 -1 -0.333
8 1.600 101 1.656 112 1.534 -205 1.627 2 -2.000
13 1.625 162 1.604 185 1.652 -331 1.615 1 0.500
21 1.615 263 1.623 297 1.605 -536 1.619 3 3.000
34 1.619 425 1.616 482 1.623 -867 1.618 4 1.333
55 1.618 688 1.619 779 1.616 -1403 1.618 7 1.750
89 1.618 1113 1.618 1261 1.619 -2270 1.618 11 1.571
144 1.618 1801 1.618 2040 1.618 -3673 1.618 18 1.636
233 1.618 2914 1.618 3301 1.618 -5943 1.618 29 1.611
377 1.618 4715 1.618 5341 1.618 -9616 1.618 47 1.621
610 1.618 7629 1.618 8642 1.618 -15559 1.618 76 1.617
987 1.618 12344 1.618 13983 1.618 -25175 1.618 123 1.618
1597 1.618 19973 1.618 22625 1.618 -40734 1.618 199 1.618
2584 1.618 32317 1.618 36608 1.618 -65909 1.618 322 1.618
4181 1.618 52290 1.618 59233 1.618 -106643 1.618 521 1.618
6765 1.618 84607 1.618 95841 1.618 -172552 1.618 843 1.618
10946 1.618 136897 1.618 155074 1.618 -279195 1.618 1364 1.618
17711 1.618 221504 1.618 250915 1.618 -451747 1.618 2207 1.618
28657 1.618 358401 1.618 405989 1.618 -730942 1.618 3571 1.618
46368 1.618 579905 1.618 656904 1.618 -1182689 1.618 5778 1.618
75025 1.618 938306 1.618 1062893 1.618 -1913631 1.618 9349 1.618
121393 1.618 1518211 1.618 1719797 1.618 -3096320 1.618 15127 1.618
196418 1.618 2456517 1.618 2782690 1.618 -5009951 1.618 24476 1.618
317811 1.618 3974728 1.618 4502487 1.618 -8106271 1.618 39603 1.618
514229 1.618 6431245 1.618 7285177 1.618 -13116222 1.618 64079 1.618
832040 1.618 10405973 1.618 11787664 1.618 -21222493 1.618 103682 1.618
1346269 1.618 16837218 1.618 19072841 1.618 -34338715 1.618 167761 1.618
2178309 1.618 27243191 1.618 30860505 1.618 -55561208 1.618 271443 1.618
3524578 1.618 44080409 1.618 49933346 1.618 -89899923 1.618 439204 1.618
5702887 1.618 71323600 1.618 80793851 1.618 -145461131 1.618 710647 1.618
9227465 1.618 115404009 1.618 130727197 1.618 -235361054 1.618 1149851 1.618
14930352 1.618 186727609 1.618 211521048 1.618 -380822185 1.618 1860498 1.618
24157817 1.618 302131618 1.618 342248245 1.618 -616183239 1.618 3010349 1.618
39088169 1.618 488859227 1.618 553769293 1.618 -997005424 1.618 4870847 1.618
63245986 1.618 790990845 1.618 896017538 1.618 -1613188663 1.618 7881196 1.618
102334155 1.618 1279850072 1.618 1449786831 1.618 -2610194087 1.618 12752043 1.618
165580141 1.618 2070840917 1.618 2345804369 1.618 -4223382750 1.618 20633239 1.618
267914296 1.618 3350690989 1.618 3795591200 1.618 -6833576837 1.618 33385282 1.618
433494437 1.618 5421531906 1.618 6141395569 1.618 -1.1057E+10 1.618 54018521 1.618
701408733 1.618 8772222895 1.618 9936986769 1.618 -1.7891E+10 1.618 87403803 1.618
1134903170 1.618 1.4194E+10 1.618 1.6078E+10 1.618 -2.8947E+10 1.618 1.41E+08 1.618
1836311903 1.618 2.2966E+10 1.618 2.6015E+10 1.618 -4.6838E+10 1.618 2.29E+08 1.618
Lets Not Get Too Carried Away Here
Before you completely dismiss the usefulness of Fibonacci, let me say this
about itI have studied Fibonacci relationships in the markets for many
years.and I have found few other concepts or tools that are as helpful or as
consistent. Im speaking here of the major relationships, such as .618, .382, 1.618
and so forth (there are others), and not the numbers themselves. As a matter of fact,
using these relationships is one of the major inputs that I use to this day in my own
tradingand I highly recommend that if you are not thoroughly familiar with the
associated concepts, that you take the time and trouble to learn about themthen
decide whether or not they deserve a place in your own approach to trading. There
are a number of excellent books on the subject which I highly recommend, all of
which are available on the Traders Press website, www.traderspress.com . You can
search for the following titles there by title or by the authors last name. I suggest
that you take a look at these and consider adding one or more of them to your
trading library:
Carolyn Boroden, Fibonacci Trading
(http://www.traderspress.com/detail.php?PKey=592)
Michael Jardine, NewFrontiersinFibonacci Trading
(http://www.traderspress.com/detail.php?PKey=266 )
Connie Brown, Fibonacci Analysis
(http://www.traderspress.com/detail.php?PKey=601 )
There are a number of other worthwhile items available on Fibonacci as it
relates to trading. To check them out, do a search of the Fibonacci category on the
website:
http://www.traderspress.com/categoryResults.php?S_CatID=40&Submit=Search+Categories
Im hoping this little tongue-in-cheek article brought a smile to your face,
made your day a bit more enjoyable, and contributed in some small way to further
your understanding and knowledge of Fibonacci numbers and relationships.
Edward Dobson September 3, 2008
Greenville SC
51
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