This chapter is extremely dear to my heart because knowledge of the Fibonaccis saved my financial life. You have no idea how many times I wanted to throw in the towel because I couldn't figure out how the market works. Every new trader has dreams, and those dreams can quickly turn into nightmares when you don't know what you are doing, which is why I am so adamant about finding a mentor. I didn't have a mentor, and my dreams quickly turned into nightmares.
The name Leonardo Fibonacci was airmailed to me straight from heaven. The understanding of his discoveries changed not only my trading
career but also my life. What he discovered between the late 1100s and early 1200s explains how nature takes its course and proves that we are created in a numerical sequence, just like pinecones and pineapples. His discoveries also prove that the market is not this mysterious chaotic place that most people fear. It is a place where organized chaos exists, a dynamic system that is extremely sensitive to the human condition—the ebb and flow, the yin and yang, the action and reaction, the ups and downs of life. The Fibonacci Numerical Sequence is the ultimate display in the market of matter and energy and their interactions with each other.
When I heard about the Fibonacci numbers, back in the early 1990s, no one seemed to know anything about them. So I called my trading data provider, figuring that if anyone would know about the Fibonacci numerical sequence and how to trade it, they would. After all, they provide market data to more than 200,000 traders worldwide. To my surprise, the customer service representative had never heard of Fibonacci and suggested I talk to their programmer. Fortunately, he had heard of the Fibonacci retracement levels and asked if I wanted them programmed into the software. I was like a kid in a candy store getting free candy screaming, "Yes!"
As life goes, if it sounds too good to be true, it usually is. The next day, the programmer called telling me the Fibonacci retracement numbers were installed into the software. I told him, "Thanks a lot. Now can you show me how to use them in a trade?"
He was quick to respond, "No, I am just a programmer, not a trader."
I felt like I was ready to throw up from eating too much "false hope" candy from the candy store. I once again sat in disbelief that I was no better off today than yesterday and back at square one.
Things turn out best for those people who make the best of how things turn out. I figured that once I had the Fibonacci levels installed, I just needed to learn how to trade them. It looked like it was going to take a bit more effort than I initially anticipated.
So I started asking everyone I knew about the Fibonaccis again. A friend of mine told me about a new book by Larry Pesavento, Fibonacci Numbers with Pattern Recognition, which I raced out to buy.
As time went on, I established a cordial working relationship with Larry and soon recognized some fundamental differences in how the Fibonaccis should be traded in the market.
You can always tell who is the more experienced in any conversation. After everything is said and done, the wiser will always take the positions that they would rather be happy than right. So as we engaged in healthy discussion on how the Fibonaccis should be traded, Larry would always say, "Jared, if that way works for you, then I am happy for you and you need to keep doing that."
Learning how to trade the Fibonacci retracement and extension numbers like i do today started to make my life wonderful and successful. it became the main life preserver in my trading career as I moved forward.
THE HISTORY OF FIBONACCI_
Leonardo de Pisa de Fibonacci, was born in 1170 in Italy and educated in North Africa, where his father, Guilielmo, held a diplomatic post. His father's job was to represent the merchants of the Republic of Pisa who were trading in Bugia, now called Bejaia (Bejaia is a Mediterranean port in northeastern Algeria), and Leonardo traveled with him, learning about math during his father's stay there. Little by little, he began to recognize the enormous advantages of the mathematical systems of the countries they were visiting versus the Roman numerals he had been taught.
One of the mathematical concepts that intrigued Fibonacci was the nine-digit system (1,2,3,4,5,6,7,8,9) used by the Indians.
Fibonacci's travels ended around 1200, and he returned to his hometown of Pisa. It was there that he started to work with the royal families, introducing the numbers 0 through 9 (a 10-digit system). It was there that he also wrote many of his texts, including Liber Abaci in 1202, Practica Geometriae in 1220, Flos in 1225, and Liber quadratorum in 1225. Producing a book during this time was a major task, given there were no typewriters or computers and everything had to be handwritten. For this reason, human civilization has unfortunately lost some of his works on arithmetic, such as Di minor guisa and his commentary on Euclid's elements. It is interesting to note that after Leonardo introduced 0, 1, 2, 3, 4, 5, 6, 7, 8, 9 to the Roman mathematical scholars, they debated for more than 300 years whether or not the number 0 was of any value.
Back in the 13th century, Europe predominately used Roman numerals for all its mathematical calculations. The problem is that it is virtually impossible to add, subtract, multiply, and divide using Roman numerals. And for that reason, historians could not quantify the wealth of a person. Think about it. How wealthy was King Solomon or King Harrod in Biblical times? No one knows. No one was able to quantify their wealth using Roman numerals. All we know today, via the Bible, is that they had more money than they needed or could spend. Today we can easily quantify a person's or company's wealth, so we know that Bill Gates is currently worth an estimated $56 billion, down quite a bit from $96 billion prior to September 11, 2001.
For those not familiar with Roman numerals, they are I = 1, V = 5, X = 10, L = 50, C = 100, D = 500, and M = 1,000. Fibonacci's claim to fame was the introduction of the numerical arithmetic system we know today: 0, 1, 2, 3, 4, 5, 6, 7, 8, 9. One of the most important books Fibonacci wrote was Liber Abaci, which means "The Book of Calculations" when translated. It was only after he wrote this book that the Roman numeral system was replaced by the Indians' nine digits and the Arabic zaphirum ("zero").
THE FIBONACCI NUMERICAL SEQUENCE_
Fibonacci was fascinated with numbers, and his claim to fame was the discovery of a numerical sequence: the sum of the previous two numbers will always equal the next number in the sequence, as shown in the following examples:
13 + 21 = 34 21 + 34 = 55 34 + 55 = 89 55 + 89 = 144 89 + 144 = 233 144 + 233 = 377 To infinity
THE FIBONACCI SEQUENCE IN NATURE_
Since Leonardo's discovery, mathematicians have been fascinated with the relevance of this numerical sequence and ratios to our daily lives.
For example, mathematicians discovered the sequence in the breeding of rabbits (see Figure 8-1). If you start with one pair the first month, after two months you have two pairs. After three months you have three pairs, and this is where it starts to get interesting. You would think that they double each month, but they don't. After the fourth month, you only have five pairs. They multiply in the Fibonacci sequence.
FIGURE 8-1 Fibonacci Sequence in the Animal Kingdom
Sequences in Nature
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