A history on Fibonacci Numbers:

Leonardo Pisano, better known by his nickname, Fibonacci, was an Italian mathematician born in Pisa in the 12th century.

He is known to have discovered the Fibonacci Numbers, said to be based upon observations of the Great Pyramid of Gizeh in Egypt. Fibonacci Numbers are a sequence of numbers where each successive number is the sum of the two previous numbers.

e.g. 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, etc.

There are varying views on the significance of the numbers, and it’s important to understand that it is not the numbers themselves that are important, but the ratio between the numbers, also called the “Golden Ratio.”  When used in technical analysis, the golden ratio is most often translated into three percentages: – 38.2%, 50%, and 61.8%

The key Fibonacci ratio of 61.8% – also referred to as “the golden ratio” or “the golden mean” – is found by dividing one number in the series by the number that follows it. For example: 8/13 = 0.6153, and 55/89 = 0.6179.

The 38.2% ratio is found by dividing one number in the series by the number that is found two places to the right. For example: 55/144 = 0.3819.

The 23.6% ratio is found by dividing one number in the series by the number that is three places to the right. For example: 8/34 = 0.2352.

Okay, so there is some background….

The real question is whether Fibonacci retracements are a valid tool in trading emini contracts.  There has been a great deal of debate over this issue when Fibonacci systems began making their way into technical analysis in the early to mid 1990′s.

To utilize Fibonacci retracements it is important to identify the period of time you plan to analyze and ascertain the peak to trough numbers of that cycle in price movement.  Some investors use very short time periods, while swing traders may look to use far wider ranges of time periods.  Of course, you can calculate the retracements by hand, but most programs have drop and drag functions that will do it for you with a couple clicks of your mouse.  You will end up with a chart that looks as follows:

fibonacci retracements

Fibonacci theorists usually use the three main numbers, 38.2%, 50%, and 61.8% to calculate the retracement patterns in a market move.  Note:  50% is not a Fibonacci number but is commonly used.

fibonacci retracement

So, as you can see, Fibonacci theorists calculate the retracement patterns by using the retracement numbers we have outlined.   There are times when the market, for unknown reasons, follows these retracement patterns…there are other times when the market pays absolutely no attention to the numbers and they are of limited value.

A Google search will turn up scores of articles on Fibonacci retracements and a wide variety of trading applications for their use.  There are also academics who completely discount any value in the numbers and associate any apparent validity to sheer coincidence.  Some technical analyst swear by them, and they are an integral part of their trading strategy.

So, you ask, what do I think of Fibonacci Numbers?

I don’t use them very often, as it is fairly easy to eyeball the retracement patterns.  I am a chaos adherent and the Fibonacci system doesn’t dovetail very well with my investment beliefs.  I see them as having limited value in my trading scheme, which does not mean they aren’t important for other traders.  I simply don’t need them to be profitable when it comes to the scalping techniques I employ.  I encourage you to investigate Fibonacci retracements and play with them some during your trading and see if they are of value to you…we all view trading strategies in different ways.  Again, there are tons of articles on this subject and many Fibonacci adherents are very vocal in their defense of the technique.  Whether it works or not, I simply don’t use or need them.