- April 13, 2009
- Posted by: Ramki Ramakrishnan
- Category: Trading Tips
Elliott wave analysis of stock market or forex or commodity market would invariably involve the use of some Fibonacci numbers to arrive at targets for corrections or projections. If you had searched the Internet for some information about the Fibonacci number series, you would have found a lot of material, but few explain it clearly enough. So this post aims to fill some of the gaps.
The series takes on a sequence 1,1,2,3,5,8,13,21,34,55,89,144 and so on to infinity. Observe that as we go to larger numbers, the advance becomes closer in ratio to 1.618. (PHI)
Suppose you place two squares of side 1 unit (say 1 inch) side by side, you get a rectangle whose sides measure 1 by 2. Now imagine you have drawn a diagonal on this rectangle, thereby creating two right-angled triangles on either side of the diagonal. If you remember the old Pythagoras theorem that you learned while at school, you will know that the square on the hypotenuse of a right triangle is equal to the sum of the squares on the two sides! So the diagonal
= square root [(1×1)+((2×2)
=square root [1+4]
=square root 
Now let us just take the first square (of sides 1 unit each) and draw its diagonal. This diagonal will measure square root of 2 = 1.414
These two ratios, 2.236 and 1.414 are sacred roots. The reciprocals of them are 0.447 and 0.707. You will see a lot of my work is using the ratio 0.707!
Now I have a vague suspicion that some of you are more confused than before reading this article. But don’t despair. There are lots of easy stuff that you will learn as we go forward.
Meanwhile, I wish you good trading!
(Note: In a previous version of this post, I had discussed the Golden Rectangle, but while writing the post had input some incorrect numbers. This was pointed out by a diligent reader F.K. and hence I left it out for sake of clarity)