Australian Stock Report Article - Fibonacci Numbers

Much has been written about Leonardo Fibonacci, the gifted thirteenth-century Italian mathematician. Born in Pisa around 1170, Fibonacci not only introduced the modern use of decimal points, but also discovered the so-called Fibonacci sequence.

The sequence begins with 0 and 1, and then adds the previous two numbers to produce a third. The sequence then continues onwards to infinity.

These numbers are seen as the "key" to nature, with the reproduction cycles of rabbits, branching patterns seen in plant life, and the "golden mean" used in art and architecture all corresponding to this mathematical sequence.

From rabbits to robots

Fibonacci discovered that the ratios in this sequence not only recur in nature – the most common being 38.2%, 50% and 61.8% – but can also be seen in markets to indicate likely retracement levels.

Moreover, the Fibonacci sequence of numbers is also referred to by Ralph Elliot as the mathematical basis for the "Elliot Wave" principle.

As complex as this trading concept can be in theory, in practice it is readily understandable. A trend is not broken unless the share price has moved by more than 61.8%. So, if in an uptrend the share price falls (retraces) by more than 61.8%, then in theory the uptrend is reversed.

If the share price only retraces by 38.2% or 50%, the pull back is temporary and the trend will continue. Logically, the less the stock retraces the stronger the trend so a 38.2% retracement is not as significant as 50%. The same applies in downtrends

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