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# Coach's Corner: Sometimes It’s Good to Fibonacci

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October 1, 2011

Let’s face it: trading the markets would be a whole lot easier if you knew what was going to happen tomorrow (or next week, or next year). Of course, nothing can predict the future, but you might consider using a charting tool called Fibonacci retracements in your pursuit of a consistent trading strategy.

Leonardo Fibonacci was an Italian mathematician in the Middle Ages who used his brilliance to, among other things, help solve a problem about rabbit population growth. (It can’t be proved that he also opened a ristorante to solve it.) The solution was a sequence that later became known as Fibonacci numbers. Starting with 0 and 1, each number is the sum of the two previous numbers, so the sequence goes 0,1, 1, 2, 3, 5, 8,13, 21, and so on. As the sequence gets higher and higher, dividing two consecutive numbers by each other keeps getting closer to the “goldenratio” of 1:1.618 (or 0.618:1). The golden ratio appears frequently in nature and has been used in architecture for centuries.

FIGURE 1: In January 2011, SPX was in the midst of a strong uptrend. The index pulled back on January 28, and then the trend resumed. In the thinkorswim chart shown, the Fibs are drawn from the January 28 high to the January 20 low, and the 161.8% retracement line indicates the target near \$1,322. The SPX made it to the target on February 7 and 8. For illustrative purposes only. Source: thinkorswim Charts