How are fibonacci ratios arrived at in forex trading?
Question:
Answer:
Some people think that markets, including foreign exchange futures, behave like natural phenomenon, and these people are always looking for analogies to the natural sciences to use to help them decide what to do in the marketplace.
One theory is that the price of a currency will rise to 1.618 times its value before it falls to 0.618 times that value, and it will do so, repeatedly, at roughly the same time interval. Those numbers are the ratio between two consecutive numbers in the Fibonacci sequence, and the ratio of the ratio between two consecutive numbers in the sequence.
I think it's just plain silly, but speculators often have very little to go on and really want to believe they've found some sort of a law of currency value fluctuations.
If you'd like to hear something a little more sensible about how to trade in currencies, and how the natural sciences really don't apply to market economies, you might want to check out some books by George Soros.
Interpretation of the Fibonacci numbers in technical analysis anticipates changes in trends as prices tend to be near lines created by the Fibonacci studies. The four popular Fibonacci studies are arcs, fans, retracements, and time zones.
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