?Who or what is Fibonacci and What does it have to do with the Forex Market?

Fibonacci strategies in forex trading are strategies for anticipating and capturing significant turns in stocks, stock indices and exchange-traded funds. They use classic principles and applications of Fibonacci numbers and a trading system known as the Elliott Wave. The idea is to calculate and predict key turning points in the markets, analyze business and economic cycles and identify profitable turning points in interest rate movement. Many forex traders benefit from the system and from Fibonacci. But, who is Fibonacci?

From 1170 to 1250 Fibonacci was the name used by the Italian mathematician Leonardo Pisano. The son of Guilielmo and a member of the Bonacci family, Fibonacci himself sometimes used the name Bigollo, which may mean good-for-nothing traveller. A brilliant mathematician who wrote several books, Fibonacci was a genius ahead of his day. He is most well known today for the sequence 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, etc, which figures prominently in what is today known as Fibonaccian mathematics, and has a quarterly scholarly journal devoted to it. Fibonacci introduced the western world, which until that time had used the Roman numeral system, to the modern decimal system, imported from Babylonia. The Fibonacci number sequence are studied as part of number theory and have applications in the counting of mathematical objects such as sets, permutations and sequences as well as in computer science.

Fibonacci believed that Arabic numerals were simpler and more efficient than Roman numerals. He traveled throughout the Mediterranean world of his day and studied under the major Arab mathematicians of the day, and returned to Pisa around 1200. In the year 1202, when he was 32 years old, he published what he had learned in The Book of Calculation. In it he showed the practical importance of this new to Europeans number system by applying it to commercial accounting and to conversion of weights and measures. He also showed how to apply it to the calculation of interest, money-changing, and many other applications. The book was well received in educated Europe and it had a profound impact on European thought. Still the use of decimal numerals did not become widespread until the invention of printing almost three hundred years later. Fibonacci was honored to be a guest of the Holy Roman Emperor Frederick II who was a fan of mathematics and science. In the year 1240 his city, the Republic of Pisa honored him by paying him a salary from the city.

In practicality Fibonacci’s numbers are used in the run time analysis of Euclid’s algorithm determining he greatest common divisor of two integers. It was also used by Yuri Matiyasevich to solve Hilbert’s tenth problem. The numbers are also used in a formula about diagonals Pascal’s triangle. He said that every positive integer can be written uniquely in a way as the sum of one or more distinct Fibonacci numbers and inn that way the sum does not include any two consecutive numbers, which is called Zeckendorf’s theorem. A sum of Fibonacci numbers that satisfies these ideas is a Zeckendorf representation. They are also used for tuning of musical interments in art to determine the size of formal elements.

The numbers are also commonly found in nature. They have been found in the patterns of leaves, grass and flowers, and branching in bushes and trees. Fibonacci numbers can also be found in the arrangement of tines on a pine cone, in raspberry seeds and other natural areas. Commonly Fibonacci numbers are seen in fractal Fuchsian groups and Kleinian groups, and in the solutions to reaction diffusion differential equations. Genes too and enzymes often show Fibonacci patterns.

Known in his day and recognized as a genius, he was able to see patterns that escaped most others, and only in the modern age of computers are his numbers and patterns able to be utilized anywhere near what he envisioned them to be used for. His translation of Arabic numerals to replace the rather limited and bulky Roman system of numerals is a debt the entire modern world owes to him. And certainly serious forex traders also owe a debt to this man from Pisa.

?The Mysterious Workings of the Exchange Rate and the Impact on Forex

Exchange rates. Euros, dollars, yen, marks, francs; Floating exchange rates, pips, points ??” the whole concept of the exchange rate can be a daunting one for a beginning trader. But understanding how exchange rates work and how they affect forex markets is essential if you’re going to last longer than the time it takes to make one /really/ bad trade. Get ready, get yourself your favorite soothing beverage, and let’s dive in to the mysterious workings of the exchange rate. By the time you’re done with your drink, you’ll have a better understanding of the way the exchange rate works and how it affects the money you make in your trading.

What the heck is an exchange rate?

The exchange rate refers to the relative worth of one type of currency against another. To make it very simple for you, let’s use an exchange rate with which you are already familiar ??” the exchange rate of dollars to dimes. Suppose you have 10 one dollar bills. You know that each of those dollar bills is worth 10 dimes. You could, if you wanted, go to the bank ??” or the corner store ??” and ask to exchange your 10 dollar bills for 100 dimes. The exchange rate would be expressed as DOL/DIM=.10 or DIM/DOL=10. In other words, you can exchange one dollar for 10 dimes or 10 dimes for one dollar.

The same holds true when you expand the definition to include foreign currencies. Instead of dollars and dimes, your dealing with Euros, yen, pounds and francs. EUR/USD=1.1023 means that each euro is worth $1.1023 (yes, in forex we go to four decimal points because of the large volume of trading). In reverse, that would be expressed as USD/EUR=.9071. In other words, if you want to trade US dollars for Euros, it will cost you $1,102.30 to get 1000 Euros.

But exchange rates move up and down! How does that work?

Let’s go back to our dollars and dimes. Let’s say that your corner store has decided that from now on, it will only accept payment in dimes. If you want to buy a gallon of milk there, your dollar bills are now worthless. In order to buy that gallon, you’re going to have to find someone to give you 30 dimes for your three dollars. That works out just fine ??” until there’s a shortage of dimes in the neighborhood. You go to your brother, whose been tossing all his change into a bucket for the last five years and tell him, “I’ll give you three dollar bills for 27 dimes because I need $2.70 to buy a gallon of milk.”

You’ve just effectively changed the currency exchange rate from DOL/DIM=.10 to DOL/DIM=.11. That means every dollar is now worth 11 dimes instead of ten ??” and if you want to buy $100 worth of dimes, you’ll get 90 dimes, not 100.

The same thing happens in the international currency market. If you want to buy goods in Japan, you need to trade with Japanese money. If all you have is dollars, then you need to exchange your dollars for yen. If lots of people are trying to buy yen at the same time, then you’re going to end up paying (exchanging) more dollars for less yen ??” and the products that you’re buying cost you more.

So why would people want to buy more yen?

When a country’s economy is strong, people know that they’ll make more money if they invest in businesses and products in that country. In order to buy products or invest money there, they need to exchange their currency for that country’s currency. If there’s a rumor that a major industry in that country is about to fail, people will want to get out ??” and will start trading in their yen for dollars or Euros or Aussies ??” whichever is the best exchange rate you can get.

So it’s all about supply and demand?

There are a couple of other factors that influence exchange rates. One of those is the interest rate. When you hold currency, you earn interest in that country’s currency at their prevailing rate. If the interest rate is higher for yen than for dollars, then people will trade in their dollars for yen in order to earn a higher rate. A second factor is the inflation rate. When the inflation rate in a country is high, people don’t want to hold that country’s currency since the value of the money is going down. Likewise, if the inflation rate is low, people are more likely to want the country’s currency because the value isn’t expected to go down.

One other important factor in the exchange rate is trade with other countries. If world prices for a country’s exports go up in relation to their imports, they’ll be making more on what they sell than they are spending for what they buy. You can see this most clearly in the price of oil. The US buys a large percentage of its oil from Canada. As the price of oil on the world market increases, the exchange rate of Canadian dollars to US dollars goes down ??” Canadian dollars become more valuable because the Canadian economy is growing stronger.

Obviously, there’s far more to the intricacies of floating currency exchange rates, but this basic primer should help you understand some of the more complex writings on the subject.