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Support / Knowledge Emporium / Fibonacci: the Wanderer's Conundrum

Fibonacci: the Wanderer's Conundrum

Or What is Behind One of Today's Most Popular Trading Concepts

Today, many centuries later, it's pretty hard to say what turned that modest Italian lad, who often referred to himself as Bigollo, which, along with 'wanderer," can also mean "a good-for-nothing, a lay-about", into a figure so much venerated by thousands and thousands of our contemporaries who concern themselves mostly with matters of purely practical nature. It is most likely to be owing to Leonardo Pisano's (yes, that's the guy's real name) extensive travel alongside his father, a diplomat, who represented the Republic of Pisa in the small 12-th century world beyond its borders. It is exactly during these travels that the now renowned Fibonacci picked up the ancient Indian system of nine symbols and some other mathematical skills to further develop and formalize the teachings he was initiated into when he was past traveling and back home in 1200.

One of the Italian's works, Libre Abaci, contained some practical tasks that were related to merchant trade, price calculations, and other problems that needed to be solved by the trading folk as a matter of their everyday activities.

An attempt to solve a sum about the propagation ability of rabbits gave birth to the system of magic numbers Leonardo Pisano Fibonacci is revered for today as much as he was almost eight centuries ago. A sequence whereby each number is the sum of the two numbers that precede it seems to be nature's underlying principle behind life's many events and phenomena.

Leonardo Fibonacci had also applied his life-inspired theory in conjunction with geometrical constructions. And strange as it is, the nuptials, assumingly performed by a pair of the creatures in the 12-th century, still help a quite a bit of folks to cash in. At least, they claim that to be so. So what are the chances in the Fibonacci game?

The Enigmatic Legacy

Nowadays, there are four types of trading tools that are based on Fibonacci's discovery: arcs, fans, retracements, extensions and time zones. The lines created by these "Fibonacci studies" are believed to signal changes in trends as the prices draw near them. Today, Fibonacci studies are a well-known technical analysis method that has numerous followers. And, yes, this method does work rather often. However, the following simple question arises, answering which is key to trading profitably with Fibonacci studies: why, when and how does that happen? Answering this question will help us answer another not less important question: how much trust can one really put in the Fibonacci tools, for, after all, even the most ardent of the admirers will most certainly agree that the theory does not give a 100 % guarantee?

How It Works

Many traders believe that Fibonacci studies are a relatively easy to understand trading tool that is based on a simple, trenchantly defined principle and has been proven effective over the time by a large number of successful market players. It is a popular opinion that when correctly applied, the Fibonacci tools can successfully predict the market behavior in the 70% of cases, especially when a specific price is predicted. Others reckon that computations for multiple retracements are a real drag and after a while all you have and can use is a mess. The opponents of the method also believe it to be too time-consuming. But, probably, the greatest disadvantage of the Fibonacci method is the complexity of the results for reading and the ensuing inability of very many traders to really understand them.

Of course, the "nature's Golden ratio," discovered by the brainy 12-th century Italian, does hold true in many instances. There is no denying it either that as far as trading the market is concerned, the famous cosmic law oftentimes holds true as well. However, think of the number of those who are at least aware of the Fibonacci tools, let alone rely on them heavily. Used by a vast number of traders, the Fibonacci studies themselves become if not the governing law, then a very major factor influencing the market. Most of the time, the Fibonacci studies work due to the cascade effect, which arises because of the huge number of traders (up to 80 % of all the market players when the pivots are clear enough) drawing about the same kind of thing on their charts, thus artificially creating support and resistance levels.

The market is a complex system, and the realization of the true nature of Fibonacci studies as a "self-fulfilling prophecy" (well, at least to a great extent it is so) will help you use the tools more efficiently. How? Very simple -it will help you avoid any perilous over-reliance on them. Your trading will become more versatile and, thus, more efficient.

The Fibonacci method should be used in a combination with other methods, and the results derived should be considered just another point in favor of a decision if they coincide with the results, produced by the other methods in the combination.

And that's when the magic will begin to work.

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