The Magical Numbers of the Fibonacci Series

In the 12th century, an Italian mathematician traveled to the Middle East and was introduced to a mysterious set of numbers, which he brought back to the Western world and which now bear his name: the Fibonacci series.

The series is produced by adding any two adjacent numbers to arrive at the next-higher number, or subtracting to arrive at the next lower number. Starting with 1, the series is: 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610 etc., to infinity.

After the smaller numbers, each of the Fibonacci is related to the next-higher number by the ratio of 1:1.618 and to the next-lower number by a ratio of 0.618:1.

The Fibonacci ratios can be used by traders to forecast price and time targets. They're found virtually everywhere in Elliott Wave analysis. One complete cycle has eight waves, five up and three down, all of which are Fibonacci numbers. Two further subdivisions will produce 34 and 144 waves, also Fibonacci numbers.

The mathematical basis of the wave theory on the Fibonacci sequence, however, goes beyond just wave counting. There's also the question of proportional relationships between the different waves. The most common ratios used by market technicians are 0.382, 0.500, 0.618, 0.79, 1.27 and 1.618.