Leonardo Fibonacci was an Italian
mathematician who developed a sequence of numbers called the Fibonacci numbers.
The series of numbers are basically the sum of two preceding numbers that makes
up the sequence. It starts with 0 then followed by 1 and then adding up the
two numbers to create the next number in the sequence whereas, 0+1 = 1 therefore
the first three numbers would be 0,1,1. To create the fourth number in the sequence
we add the last two preceding numbers 1+1=2 and it goes on to infinity.
Within these sequence of numbers, there is a ratio that would produce an average
quotient when two preceding numbers are divided this is called the golden mean.
An average ratio of 61.8% derives from dividing the two numbers in the sequence
which are right next to each other. For example, 8/13= 0.6153 or 89/144= .6180.
The average ratio of 38.2% is found when a number in the sequence is divided
by a number two places away from it. 5/13= 0.3846 or 34/89 = 0.3820. The
golden mean ratios are relevant applications to the financial markets since
traders use these Fibonacci ratios to determine possible reversal points or
profit targets. The probability of other traders placing critical orders when
prices hits these levels are high therefore it is a good way to ride the momentum
when several transactions are executed.