Fibonacci Number Series

Elliott wave analysis of stock market or forex or commodity market would invariably involve the use of some Fibonacci numbers to arrive at targets for corrections or projections. If you had searched the Internet for some information about the Fibonacci number series, you would have found a lot of material, but few explain it clearly enough. So this post aims to fill some of the gaps.

The series takes on a sequence 1,1,2,3,5,8,13,21,34,55,89,144 and so on to infinity. Observe that as we go to larger numbers, the advance becomes closer in ratio to 1.618. (PHI)

Suppose you place two squares of side 1 unit (say 1 inch) side by side, you get a rectangle whose sides measure 1 by 2. This rectangle is called the Golden Rectangle. Now imagine you have drawn a diagonal on this rectangle, thereby creating two right-angled triangles on either side of the diagonal. If you remember the old Pythagoras theorem that you learned while at school, you will know that the square on the hypotenuse of a right triangle is equal to the sum of the squares on the two sides! So the diagonal
= square root [(1x1)+((1.618034x1.618034)
=square root [1+2.618034]
=square root [3.618034]
=1.90211 which is the number 2 when rounded off.

If we multiply each side of the rectangle now by 1.618034, we get the next degree.
So we now have a rectangle whose sides are 1.6198034 and 2.618034. Following the same steps as above, ie drawing the diagonal and measuring it, we know it will
=square root of [(1.618034x1.618034)+(2.618034x2.618034)]
=square root [9.472136]
=3.07768

If we divide the new diagonal by the old diagonal, we will get 1.618034. So all future diagonals will increase by a factor of 1.618034 if we expand the sides by PHI. Rounding off all the values of the diagonals will give us the Fibonacci Number Series.

Now I have a vague suspicion that some of you are more confused than before reading this article. But don’t despair. There are lots of easy stuff that you will learn as we go forward.
Meanwhile, I wish you good trading!