The Fibonacci number sequence and golden ratio is important throughout nature, but traders such as W D Gann made great use of the sequence as a trading tool.
The numbers helped make Gann millions in profits and are useful for any trader to maximize profits.
So what are they and how are they applied to trading?
Let’s find out: Support and resistance levels are important for traders as they help identify entry and exit points when trading.
Fibonacci percentage "retracement" levels based upon the Fibonacci number sequence and golden ratio are used by many savvy traders to improve their entry and exit points.
Fibonacci Numbers and the Golden Ratio
The Fibonacci sequence was printed in the Liber Abaci, written by Leonardo Fibonacci in 1202. It introduced Hindu-Arabic numerals for the first time To Europe, which are at the time was still using roman numerals.
The Fibonacci number sequence came about from the following question:
How many pairs of rabbits can be generated from a single pair, if each month each mature pair produces a new pair, which, from the second month, starts producing?
While the Fibonacci number sequence and golden ratio came about form the above question it produced a number sequence that has importance throughout nature.
After the first few numbers in the sequence, the ratio of any number to the next higher number is approximately .618, and the lower number is 1.618. These two figures are referred to as the golden mean or the golden ratio.
The golden mean and golden ratio
The proportions reflected in these numbers are pleasing to the human senses and appear throughout biology, art, music, and architecture.
A few examples of natural shapes based on the Golden Ratio include: Snail shells, galaxies, and hurricanes DNA molecules, sunflowers and many more.
Many traders have found these numbers important in trading as well and such traders as W D Gann for example, used them to amass huge profits.
Retracement Levels
The two Fibonacci percentage retracement levels considered the most important for traders are: 38.2% and 62.8%. Other important retracement percentages are: 75%, 50%, and 33%. Fibonacci Numbers 3 Uses For Traders
1. Fibonacci numbers Define exit numbers
For example, if three or more Fibonacci price levels come together in a tight zone, a stop loss can be placed above the area which denotes important support or resistance.
Setting stops using Fibonacci retracements give important areas that act as support or resistance, allowing traders to set pre defined exit points in a disciplined manner.
2. Fibonacci levels Decide Position Size
Depending on the risk you are prepared to take per trade, Fibonacci numbers can also define the size of position taken. This is because the distance from the stop is different in monetary terms on all trades.
A stop close to resistance and support may warrant a bigger position than one where support or resistance is further away.
3. Fibonacci numbers Define Profit Objectives
With Fibonacci numbers, once a pattern completes against a Fibonacci price area traders can use them for profit objectives. This clear view of where trades may go helps traders to lock in profits at set levels.
The advantage of Fibonacci numbers are: They allow traders to have specific stop loss and profit objectives IN ADVANCE.
One of the keys to trading any market is discipline most traders simply don’t set profit and loss objectives in advance. They therefore let emotions take over, they get greedy or rely on hope and this creates losses over the longer term. Profits are run to long and lost and losses become bigger than they should.
“Run your profits and cut your losses is the way to make longer term capital gains and Fibonacci numbers incorporated in your trading plan will help you do this.
W D Gann was a trader who understood that using Fibonacci numbers could make large profits and used them with stunning success.
Fibonacci numbers combined with the techniques of WD Gann can help any trader achieve long term capital gains. Check out these great profit tools and incorporate them in your trading as they will help you increase your profit potential.
http://www.gann.co.uk
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