by Lee Gettess

Leonardo Pisano de Fibonacci was a mathematician in the early 13th century.  His major writings were not published until 1857, probably because no editor could determine what he was trying to say.  His summation series basically was to add two numbers together to get the next number in sequence.  For instance, 1, 2, 3, 5, 8, 13, 21, 34, etc.  Also, .382 and .618 are commonly thought of as part of the series, since they add up to 1.  Each number also bears approximately that relationship to another in the series as well.  For instance, 8 divided by 13 equals .6153, 13 divided by 21 equals .619, etc.  It has also been noted that the Great Pyramid of Gizeh has a height to base relationship of .618; that the nautilus maintains a Fibonacci relationship between the size of is spirals.  Also, that the great artist da Vinci used Fibonacci ratios in much of his work.  What does all of this mean to traders?  I don’t know, but it sure makes for a great excuse to use these numbers for trading!  Many traders have Fibonacci-based explanations for virtually every move the markets make, but that is far beyond the scope of what we are discussing here.

We are simply going to use the .382 and .618 numbers to figure percentage retracements of price swings.  Let’s assume, for instance, that the D-Mark has moved from a low of 6447 to a high of 6477.  Since that is a 30-point move, we would multiply 30 by .382 to get 11.46.  We would then subtract 11 from 6477 to get 6466, a level where we might anticipate support in the market.  Will we buy there?  Perhaps…

We are also going to use 50% retracements, even though it is not technically a Fibonacci number.  It is a number that W.D. Gann talked about in his writings of the 1920’s, 30’s, and 40’s.  Gann was a trader of mythical proportions, who either made $50 million or less than nothing during his trading career, depending on what reports you believe.  How much he made is rather unimportant, unless you were mentioned in his will.  We may be able to make money with the 50% mark, and that is the important point!

Incidentally, .5 is almost exactly between .382 and .618, which must make it significant!  Actually, in watching various time frame charts over several years of trading, the 50% mark of previous price swings probably gets hit and offers at least a goods-sized bounce in price more frequently than any other support or resistance point.  A very strong trending market may not retrace back to 50% so you may miss the strongest moves, but it probably works more often than any other level.  That is purely an observational, empirical statement, but look on the charts for yourself and see if it doesn’t prove true.

In looking for these retracements, it is usually very easy to find a price swing that would have provided the correct level for where a move terminates, provided you do so after the swings are completed.  That doesn’t do us much good, since we can be taxed retroactively, but we can’t go back and trade the past!  We need to have rules to tell us what to look for as it is occurring.  Whatever time frame you have decided to trade, simply look at the most recent price swing to determine the retracement levels.  If the market is going up (and you will know this due to your oscillator), you measure from the most recent swing low up to the current high to get your retracements, which you then subtract from that high.  If the market is headed down, you measure from the most recent swing high down to the current low, then add your percentage to that low to get your retracement level.