If you are looking at putting a a trading system together a Fibonacci trading strategy is used by many traders, in the belief they can enhance profitability form there trading – Let's look at Fibonacci trading techniques in more detail.

Let's look at the background to this popular theory and then its applications in the currency markets.

Leonardo Fibonacci

The Fibonacci sequence was first printed in the Liber Abaci, written and published by Leonardo Fibonacci in 1202 and the book introduced Hindu-Arabic numerals for the first time To Europe, which are at the time was still using Roman numerals. Fibonacci was a brilliant mathematician and set out to solve a specific problem which as::

How many pairs of rabbits can be generated from a single pair, if each month each, each pair produces a new pair and from the second month the pair, starts producing more rabbits?

The Fibonacci Number Sequence

The equation that was used to solve the problem was:

If Fn is the nth Fibonacci number, then successive terms are formed by addition of the previous two terms, so the equation is - FN+1 = Fn + Fn-1, F1 = 1, F2 = The ratio of any number to the next larger number is 62%, which is a popular Fibonacci retracement level.

The definition of the sequence is therefore a series of numbers where each number is the sum of the two preceding numbers; 1, 1, 2, 3, 5, 8, 13... etc. When applied to Forex trading it's the ratios derived from the sequence that are used on Forex charts: 236, .50, .382, .618, etc. The two levels therefore which are considered most important in trading are: 38.2% and 62.8%. Other important numbers used in by FX trading are: 75%, 50%, and 33%.

Fibonacci and the Prediction of FX Price Movement

In the natural universe and throughout nature you will hear a lot about the Golden Mean and how these numbers appear again and again and the devotees of Fibonacci believe they can be used to pinpoint areas of support or resistance in the market to buy and sell into. You will also see the Fibonacci number sequence quoted a lot in the scientific theories of Elliot Wave and Gann which claim to predict the future.

Fibonacci Numbers do they Enhance Profitability?

How accurate is the Fibonacci number sequence in predicting whether levels in the market will hold or not? Probably as accurate as your horoscope.

Applying this theory to Forex is laughable and this is not to take anything away from Fibonacci who was a brilliant thinker but to apply a theory in relation to the copulation of rabbits to Forex is ridiculous. As for the theory being scientific, this is obviously not true, because if it were scientific it would work all the time and of course it doesn't.

A Good Story But..

Fibonacci trading strategies are sold online and yes it is a good story but if you think they work, try them and see for yourself. The theory is loved by the far out investment crowd, who love its mystical connotations but you should really avoid systems based on the theory. The idea that markets move to science is simply not true – if they did, we would all know the price in advance and there would be no market.

FX markets move to the odds and there is no strategy which can predict the future and don't let anyone tell you otherwise.