Part 24 Technical Analysis – Fibonacci Sequence

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How Fibonacci numbers help in technical analysis?

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Let me answer your question in short and to-the-point manner.

Fibonacci numbers are basically numbers In a sequence where every number in it is the sum of the two preceding numbers.

Such as 1,1,2,3,5,8,13 and so on.

They appear everywhere in Nature, from the leaf arrangement in plants, to the pattern of the florets of a flower, the bracts of a pinecone, or the scales of a pineapple.

In technical analysis, these numbers represent ‘Retracement levels’ (points from where a particular trend will reverse). These levels are of much use to technical analysts since they represent entry and exit points.

Part 24: Technical Analysis – Fibonacci Sequence

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Different methods of computing the fibonacci sequence using recursion, dynamic programming and matricies.

  • Method 1: Basic recursive call. Not efficient because it re-computes already computed values in the recursion tree. Exponential time complexity .
  • Method 2: Dynamic programming approach #1. Efficient in the sense of time because we use a table to compute future values. O(N) time complexity .
  • Method 3: Dynamic programming approach #2. Efficient in the sense of time and good with space. O(N) time complexity .
  • Method 4: Q-Matrix Approach. Very efficient. O(log(n))
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Fibonacci Sequence

The Fibonacci Sequence is the series of numbers:

0, 1, 1, 2, 3, 5, 8, 13, 21, 34, .

The next number is found by adding up the two numbers before it.

  • The 2 is found by adding the two numbers before it (1+1)
  • The 3 is found by adding the two numbers before it (1+2),
  • And the 5 is (2+3),
  • and so on!

Example: the next number in the sequence above is 21+34 = 55

It is that simple!

Here is a longer list:

0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987, 1597, 2584, 4181, 6765, 10946, 17711, 28657, 46368, 75025, 121393, 196418, 317811, .

Can you figure out the next few numbers?

Makes A Spiral

When we make squares with those widths, we get a nice spiral:

Do you see how the squares fit neatly together?
For example 5 and 8 make 13, 8 and 13 make 21, and so on.

The Rule

The Fibonacci Sequence can be written as a “Rule” (see Sequences and Series).

First, the terms are numbered from 0 onwards like this:

Type Name Latest commit message Commit time
Failed to load latest commit information.
n = 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 .
xn = 0 1 1 2 3 5 8 13 21 34 55 89 144 233 377 .

So term number 6 is called x6 (which equals 8).

Example: the 8th term is
the 7th term plus the 6th term:

So we can write the rule:

Example: term 9 is calculated like this:

Golden Ratio

And here is a surprise. When we take any two successive (one after the other) Fibonacci Numbers, their ratio is very close to the Golden Ratio “φ” which is approximately 1.618034.

In fact, the bigger the pair of Fibonacci Numbers, the closer the approximation. Let us try a few:

1.666666666. 1.618055556. 1.618025751.

Note: this also works when we pick two random whole numbers to begin the sequence, such as 192 and 16 (we get the sequence 192, 16, 208, 224, 432, 656, 1088, 1744, 2832, 4576, 7408, 11984, 19392, 31376, . ):

It takes longer to get good values, but it shows that not just the Fibonacci Sequence can do this!

Using The Golden Ratio to Calculate Fibonacci Numbers

And even more surprising is that we can calculate any Fibonacci Number using the Golden Ratio:

The answer always comes out as a whole number, exactly equal to the addition of the previous two terms.

When I used a calculator on this (only entering the Golden Ratio to 6 decimal places) I got the answer 8.00000033. A more accurate calculation would be closer to 8.

Try it for yourself!

You can also calculate a Fibonacci Number by multiplying the previous Fibonacci Number by the Golden Ratio and then rounding (works for numbers above 1):

Example: 8 × φ = 8 × 1.618034. = 12.94427. = 13 (rounded)

Some Interesting Things

Here is the Fibonacci sequence again:

n = 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 .
xn = 0 1 1 2 3 5 8 13 21 34 55 89 144 233 377 610 .

There is an interesting pattern:

  • Look at the number x3 = 2. Every 3rd number is a multiple of 2 (2, 8, 34, 144, 610, . )
  • Look at the number x4 = 3. Every 4th number is a multiple of 3 (3, 21, 144, . )
  • Look at the number x5 = 5. Every 5th number is a multiple of 5 (5, 55, 610, . )

And so on (every nth number is a multiple of xn).

1/89 = 0.011235955056179775.

Notice the first few digits (0,1,1,2,3,5) are the Fibonacci sequence?

In a way they all are, except multiple digit numbers (13, 21, etc) overlap, like this:

0.0
0.01
0.001
0.0002
0.00003
0.000005
0.0000008
0.00000013
0.000000021
. etc .
0.011235955056179775. = 1/89

Terms Below Zero

The sequence works below zero also, like this:

n = . -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 .
xn = . -8 5 -3 2 -1 1 0 1 1 2 3 5 8 .

(Prove to yourself that each number is found by adding up the two numbers before it!)

In fact the sequence below zero has the same numbers as the sequence above zero, except they follow a +-+- . pattern. It can be written like this:

Which says that term “-n” is equal to (в€’1) n+1 times term “n”, and the value (в€’1) n+1 neatly makes the correct 1,-1,1,-1. pattern.

History

Fibonacci was not the first to know about the sequence, it was known in India hundreds of years before!

About Fibonacci The Man

His real name was Leonardo Pisano Bogollo, and he lived between 1170 and 1250 in Italy.

“Fibonacci” was his nickname, which roughly means “Son of Bonacci”.

As well as being famous for the Fibonacci Sequence, he helped spread Hindu-Arabic Numerals (like our present numbers 0,1,2,3,4,5,6,7,8,9) through Europe in place of Roman Numerals (I, II, III, IV, V, etc). That has saved us all a lot of trouble! Thank you Leonardo.

Fibonacci Day

Fibonacci Day is November 23rd, as it has the digits “1, 1, 2, 3” which is part of the sequence. So next Nov 23 let everyone know!

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