Every once in a while I like to circle back to some of the great questions I get from you.
Today, I want to dive into one from Suzanne P., who wants to know if "Fibos" can help her make money in the markets.
In a word, yes. But, you've got to understand what "Fibo" analysis is and how it works to make it profitable….
The Mathematical Sequence That Shows Up Everywhere
"Fibo" is short for Fibonacci – as in, Leonardo Fibonacci. Born in Pisa, Italy, around 1170, he's considered by many to be the single most influential western mathematician of the Middle Ages. His 1202 book, Liber Abaci ("Book of Calculation"), remains instrumental to our understanding of mathematics to this day and is filled with examples that applied to money-changing, interest calculation, and commercial bookkeeping, for example.
Today we know Leonardo simply as "Fibonacci," which is same name given to a numerical series in his book that he did not discover but that he used as an example. Despite their reputation as being difficult or complex, in reality, Fibonacci numbers are easy to learn and easy to understand.
The sequence, if you're counting, looks like this… 1 1 2 3 5 8 13 21 34 55 and so on.
Right away you can see a pattern. One plus one equals two. One plus two equals three. Two plus three equals five. And so on.
But if you look closer, something else emerges. Every number in the series is approximately 0.618-to-1 in terms of its relationship to the number after it. This ratio never changes because the proportion remains the same.
This is important so don't lose that thought; we're going to come back to it in a minute.
What's simply amazing to me is that Fibonacci (and lots of scientists after him) have found Fibonacci numbers in nature. For example, the number of petals on flowers is often a Fibonacci number, as are the number of "cells" in a pineapple's skin. Pinecones, sunflowers, beehives… they all display Fibonacci's numbers or sequence in some way.
More amazingly, plant leaves are often arranged in spirals or shapes that, when counted, are found to be adjacent Fibonacci numbers. In fact, if you divide the arc they form along a vine, for example, the arc length angle ratio is equal to 137.5 degrees. The numbers are so consistent that the relationship is actually called the "Golden Ratio" or the "Golden Mean."
Mathematically, it looks like this, where the Greek letter phi represents the golden ratio:
Geometrically, if you draw it out, the Fibonacci ratio or "Golden Mean," if you prefer, looks like this…
These relationships can be found all over the place in the natural world in everything from dolphins' fin sections to the ratio between human forearms and hands. Even the cochlea in our inner ear is a "golden" spiral adhering to this set of proportions.
Fibonacci numbers and ratios can also be found – you guessed it – in the stock market.
About the Author
Keith Fitz-Gerald has been the Chief Investment Strategist for the Money Morning team since 2007. He's a seasoned market analyst with decades of experience, and a highly accurate track record. Keith regularly travels the world in search of investment opportunities others don't yet see or understand. In addition to heading The Money Map Report, Keith runs The Geiger Index, a reliable, emotion-free guide to making big money and avoiding losses, and High Velocity Profits, which aims to get in, target gains, and get out clean. In his weekly Total Wealth, Keith has broken down his 30-plus years of success into three parts: Trends, Risk Assessment, and Tactics – meaning the exact techniques for making money. Sign up is free at totalwealthresearch.com.