Do you know who Leonardo Fibonacci is? Now when you think of the name “Leonardo” you might think of Leonardo da Vinci, but unlike Leonardo da Vinci, Leonardo Fibonacci did not paint the Mona Lisa. No, Leonardo Fibonacci was a mathematician who lived between 1175 and 1250. He was very well known in his time and contributed greatly to the world of mathematics. One of the things that he did was that he introduced the decimal system to Europe.

He also studied a sequence of numbers that are known today as the “Fibonacci numbers.” Alternatively, they are known as the “Fibonacci sequence”.

The Fibonacci sequence starts with a zero and one. Each new number is the sum of the two previous numbers; for example, zero plus one equals two, one plus two equals three, two plus three equals five, and so on.

Therefore, the first numbers in the sequence appear like this: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, ad infinitum.

Fibonacci discovered that this series of numbers and their ratios to each other occur throughout nature and, in fact, are incredibly common in the world.

So what does this have to do with forex trading? Well, the ratios that the Fibonacci numbers show are also evident in the price movement of currencies, as well as stocks and other types of investments.

Although it’s too detailed to go into here, there are three numbers you need to focus on from this sequence. They are 0.382, 0.500 and 0.618. There are also others, but these are the most important.

These numbers help calculate what are called “retracement levels.” Many traders use retracement levels when they need to figure out where to place buy and sell orders. It works like this:

Suppose the price of a currency pair, or of a company’s stock, is trending up. History says that prices tend to peak and then temporarily reverse. Then, they continue with an uptrend. This is where the Fibonacci numbers come into play.

When a currency is trending, the price can be expected to retrace one of the Fibonacci numbers. Then, it “bounces” back to or near its original level to continue the trend. Assuming you forecast this correctly, you can buy right before the uptrend continues and make big profits.

Whichever online trading platform you use should provide you with the means to plot the Fibonacci numbers. To do this, draw a line from a low point to a high point. Redraw levels will automatically map onto the chart for you.

There are things to consider other than trading when price hits a particular Fibonacci number.

For example, you don’t know what retracement level the price will stop at. If you pick 0.382 and go down to 0.618, you could lose a lot. Also, if you pick the wrong high or low point, the retracement levels will not reflect what is actually happening and will not be of any use to you.

Finally, although the Fibonacci numbers are a good tool, they sometimes do not predict accurately. Again, remember that many variables come into play in the forex market. Therefore, do not rely on just one method, such as Fibonacci numbers, to predict what the price movement will be.