Leonardo Fibonacci was a brilliant thinker who lived in the 13th century and his Fibonacci number sequence is legendary and numerous traders use Fibonacci retracements to improve market timing, lets take a look at them in more detail.

Leonardo Fibonacci was born in Italy in 1202 and the Fibonacci number sequence was devised to solve a specific problem:

How many pairs of rabbits can be generated from one single pair, if each month each pair produces a new pair and from the second month the pair, starts producing more rabbits?

The result was a number sequence which solved the problem and is found throughout the natural world. The equation is as follows:

If Fn is the nth Fibonacci number, then successive terms are formed by addition of the previous two terms, so that FN+1 = Fn + Fn-1, F1 = 1, F2 =

The ratio of any number to the next larger number is 62%, which is a popular Fibonacci retracement level. The inverse of 62% is 38%, etc

The two levels considered the most critical by traders are therefore: 38.2% and 62.8%. Other important numbers used in trading are: 75%, 50%, and 33%.

So does using these retracement levels to time market entry help in forex trading to increase profits?

Of course not, this has got to be one of the dumbest ways of trading there is and before I carry on, I am sure Fibonacci himself, would be horrified to see the way his theory has been hijacked to do something for which it was never intended.

Of course sometimes the levels hold - but pick any level you like at random and you will find that will hold to.

So why do traders believe this nonsense?

Well there are plenty of vendors selling trading systems around it as it makes a good story and it does make a good read - but stories don't make money.

It's also very often linked to another dumb theory Elliot Wave which is highly popular.

If you don't know what Elliot Wave is briefly, it's a theory that claims to be scientific and is nothing of the sort being totally subjective, again it's a good story. However it would be interesting if Elliot were still alive today, to ask him why he made no money with his own theory, if he knew the scientific formula of market movement!

If you want to enjoy currency trading success, it's not a good idea to place you trust in a number sequence which was developed to solve a problem to do with the copulation of Rabbits!