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Fibonacci Series and Stock Prices Analysis

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28 views4 pages

Fibonacci Series and Stock Prices Analysis

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yogig14825
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Fibonacci Series: A Detailed Explanation

The Fibonacci series is one of the most famous sequences in mathematics, named after the Italian

mathematician Leonardo of Pisa, also known as Fibonacci. This sequence has many interesting

properties and applications in various fields such as computer science, mathematics, art, and even

nature.

The Fibonacci series is a sequence of numbers in which each number (called Fibonacci number) is

the sum of the two preceding ones. It starts with 0 and 1, and continues indefinitely.

Here's the beginning of the Fibonacci sequence:

0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, ...

The general formula to get the nth Fibonacci number is:

F(n) = F(n-1) + F(n-2)

Where F(0) = 0 and F(1) = 1.

From n = 2 onward, each Fibonacci number is the sum of the previous two Fibonacci numbers.

Golden Ratio:

The ratio of successive Fibonacci numbers tends to approach the Golden Ratio (phi ~ 1.618). This

means that as the numbers get larger, the ratio F(n+1) / F(n) approaches phi.

Recursive Nature:

The Fibonacci sequence is inherently recursive, meaning each term is defined in terms of previous
terms. This makes it easy to implement in computer programs using recursion.

Applications of Fibonacci Series:

1. Nature: Fibonacci numbers appear in the arrangement of leaves, patterns of seeds in a

sunflower, spirals of shells, and branching of trees.

2. Computer Algorithms: Fibonacci sequence is used in algorithms like the Fibonacci search

technique, dynamic programming, and analysis of recursive algorithms.

3. Art and Architecture: Fibonacci sequence and the Golden Ratio are used in art, design, and

architecture.

4. Finance: Fibonacci retracement levels are used in financial analysis to predict future movements

of stock prices.

Example of Fibonacci Series:

Let's manually calculate the first few numbers:

F(0) = 0

F(1) = 1

F(2) = F(1) + F(0) = 1 + 0 = 1

F(3) = F(2) + F(1) = 1 + 1 = 2

F(4) = F(3) + F(2) = 2 + 1 = 3

F(5) = F(4) + F(3) = 3 + 2 = 5

F(6) = F(5) + F(4) = 5 + 3 = 8


Fibonacci Series and Stock Prices: A Detailed Analysis
The Fibonacci series, while rooted in mathematics and nature, has been applied to the world of

finance, particularly in technical analysis of stock prices. Traders use Fibonacci tools, such as

Fibonacci retracement and extension levels, to predict potential price movements.

Key Ratios in Finance:

The key ratios derived from the Fibonacci sequence that are frequently used in stock trading are:

- 23.6%

- 38.2%

- 50% (psychologically significant)

- 61.8% (Golden Ratio)

- 78.6%

How Traders Use Fibonacci:

1. Identify a Trend: Traders identify significant price moves.

2. Plot Fibonacci Levels: Fibonacci retracement levels (like 38.2%, 50%, or 61.8%) can act as

support or resistance levels.

3. Confirmation with Other Indicators: Traders combine Fibonacci levels with other indicators like

moving averages or RSI to improve accuracy.

4. Set Profit Targets: Fibonacci extension levels like 161.8% or 261.8% are used to predict future

price targets.

Why Fibonacci Works in Markets:

It often works due to self-fulfilling prophecies where traders place buy or sell orders around these

levels. Additionally, human psychology, which tends to gravitate toward Fibonacci-based patterns,

may also explain the phenomenon.


Using Fibonacci in Trading:

- Identify Trends and key levels.

- Combine Fibonacci with other indicators.

- Use Fibonacci extension for setting profit targets.

- Manage risks with stop-loss orders at key Fibonacci levels.

In summary, Fibonacci tools are widely used in technical analysis for identifying potential reversal or

continuation points in stock prices, making them valuable for disciplined traders.

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