FIBONACCI TONES

In further understanding forex prices and how they move, we cannot ignore the pervasive
presence of Fibonacci ratios. It is certainly the case that professional traders
know and use Fibonacci ratios to map market patterns. One of the milestones in becoming
a savvier forex trader is developing your own understanding of how to recognize
and use Fibonacci ratios to shape the trade. Fibonacci is important because currency
pairs often move between support and resistance in tune to Fibonacci syncopation. After
some base of experience, looking at almost any chart, one can see retracement patterns
often along Fibonacci lines. Figure 11.7 shows such a sequence of upward and downward
moves followed by retracement stopping at Fibonacci ratios. We can observe that
first the pair made a move from a low to a high and then retraced back to 38.2 percent of
the way down (point 1) and starting moving back up. It in fact, created a new high and then moved down to a low (point 2). Having completed that low, it proceeded to move
back up again, but stopped at 50 percent of the way up (point 3). This is a sequence that,
like music, provides an underlying theme to market moves.
The application of Fibonacci patterns as a universal phenomenon is further underscored,
as musicologists have discovered them in the works of many composers including
Debussy, Bartok, and the like. The next time you listen to the second half of Scott
Joplin’s “Maple Leaf Rag,” notice the pattern of 13 stressed and 8 unstressed notes. In
fact, one can find Fibonacci patterns in the basic structure of instruments themselves.
The piano, for example, has 13 notes that separate each octave, which has 8 white
keys and 5 black keys. Forex traders will recognize the ratio of 13/8 as a Fibonacci
ratio. When using moving average crossovers, try the 13 and 8 time intervals on the
charts.
What does this mean to the forex trader? By understanding that currency prices are
not linear movements, but expressions of emotions and human behavior, the forex trader
begins to move beyond a linear approach to trading. By expanding one’s perspective
on the underlying tones of the market, he or she will likely see nested patterns that
are recursive and, as a result, new trading opportunities. As one trader notes, “Everyone’s
got the same information at the same time; therefore, you need to find a different
way of finding an edge over your competitor” (The Psychology of the Foreign Exchange
Market, p. 203). The ability to obtain the sought-after trading edge may very well depend
on how one looks for it. It would be wise to look for patterns and “listen to
the market.” It may be playing a Fibonacci melody or, for a brief moment, another
profitable tune.




By ABE COFNAS