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# Market Primer: FIBONACCI THEORY

Don't throw out the concept that you can't apply structure to unstructured data.

I subscribe to the concept that the markets (and life in general) are not chaotic, rather there is an orderly randomness to each.  If you don't want to go a little deeper, quit reading here :)

I believe that nature and math are intertwined, and there are abundant natural examples to prove this theory.  The name for this concept is Fibonacci.

The concept of Fibonacci is that things occur in cycles - whether it be a plant forming or a human growing or trading a market.  The concept is that each cycle is a growth, turn, growth etc., building upon itself until there is a solid base with no big gaps.  Fibonacci numbers are created by adding the two numbers in front of it.  0, 1, 1, 2, 3, 5, 8, 13, 21, 34 etc. This is called a Fibonacci sequence - a sequence is a pattern - a pattern is a recognizable, actionable object.  From these numbers we can get ratio's and learn specific behaviors to each one.

Fibonacci can be seen in numbers, time spans, distances etc, which are all important aspects of trading.  Especially as options traders we need to get time, price and direction from the get-go in order to have a successful trade.  The one given here is that traders will do the same thing over and over until it does not work anymore.  This is a behavioral pattern.  What creates behavioral patterns?  Psychology.  How is psychology displayed in trading?  On a chart.

A chart is psychology on a grid.  Putting the Fibonacci concept to work, we see why prices travel in the ranges they do before backing and filling.  We are creating a solid base.  We see why gaps usually fill no matter how long ago it was created. We can put some sort of logical understanding to price movement, thus being able to reasonably forecast the most likely outcome of a situation.  I don't mind if you think reasonably forecast = guess, call it whatever you will.  What interests me is being able to see when the pattern CHANGES.  When everything has been chugging along according to nature and math and charts and price action, the moon and the stars are aligned, you've rubbed your lucky rabbit's foot knowing the next step should be "THIS" - and then its not.  That is when you can take major advantage of this concept as the same Fibonacci cycles identified on the way up are also used on the way down.  You can pre-determine what action you will take in any given outcome - knowing that if the pattern changes you have an available price target based on math not luck.

Take luck out of your trading methodology and you will become a focused, stable profitable trader.  With math, its' cut and dried - either is works or it doesn't.

Earlier I noted that Fibonacci sequences allow you to calculate Fibonacci ratio's, and that the ratio's have specific behaviors. This gives you a PRICE behavioral pattern, again clearly displayed on a chart.  Anyone want to guess what its' called when you combine the theories of psychology and math?

Elliott Wave.

Things are not as random as you think :)

Suz