Why Successful Traders Use Fibonacci Retracements

[tmbaru 10]

Support and resistance levels on bar charts are one of the major components in the study of technical analysis in Forex trading. Many traders make use of support and resistance levels to examine entry and exit points when trading markets. When establishing support and resistance levels on charts, a trader should not overlook Fibonacci percentage ‘retracement’ levels.

 

What is a retracement? A retracement is a pullback of the currency price before the price resumes the original direction of movement.

 

What is Fibonacci retracement? Fibonacci retracement is one of the many aspects of Forex market technical analysis. Fibonacci in the Forex market is a type of line study used to predict as well as calculate price pullback levels. It is placed directly on the price chart within the trading platform and this technical indicator will automatically calculate the pullback levels on the currency price chart.

 

Fibonacci Retracement is used to determine support and resistance levels in the market. Fibonacci Retracement is essentially based on the assumption that the market will follow a predictable pattern and at particular points it will retrace its steps before moving on with its original direction. This technical analysis utilizes ratios from numbers in a series; you can take 2 numbers in the series and divide them to form a ratio. The 2 Fibonacci technical % retracement levels that are most crucial in Forex market analysis are 38.2% and 62.8%. Most Forex market technicians will track a retracement of a price uptrend from the beginning to its most recent peak. Other important retracement %s are 75%, 50% and 33%. For instance, if a price trend starts at 0, peaks at 100, and thereafter declines to 50, then it would be a 50% retracement. The ratio of 0.0% is considered the start when the Forex market retraces itself while the ratio of 100% marks when the market entirely reverses its direction. These 2 points are referred to as the trough and the peak respectively. Once you identify these 2 points in the trading patterns, then it is time to start identifying possible support and resistance levels.

Why Use Fibonacci Retracement

The main purpose of using technical analysis in the Forex market is to identify trends and patterns that can be utilized to evaluate the optimal time to buy or sell currency on the market. There are many different strategies that traders employ for technical analysis and Fibonacci Retracements is one of the many strategies that can be used. Fibonacci Retracement is based on the belief that the Forex market will move in one particular direction and at specific points it will retrace its steps before moving forward in its original direction. This strategy attempts to identify these points on time so that you can make a successful trade.

 

The price of a Forex currency pair does not necessarily move up or down in a straight line. Usually it moves up or down in a zigzag pattern. Fibonacci Retracement Levels comes in handy as the tool that is used to calculate where the zigzag will stop. The Fibonacci levels are 38.2%, 50% and 62.8%, these points form the points at which price is likely to make a pullback.

 

Fibonacci Retracements are an effective technical analysis strategy that Forex traders can use to profit from strong trends when trading in the Forex market. The ratios created helps traders to determine when you should enter the market based on a set of numbers that naturally occur in nature. During the trend, the market will retrace by a certain % point and that pullback is essentially at one of the Fibonacci ratios. However, to fully profit from techniques such as Fibonacci retracements you need to understand other aspects of technical analysis as well.

The trend is your friend" - always identify the prevailing trend, and never trade against it, but rather wait for retracements and then enter trades in the direction of the trend.

[DbPhoenix 42]

Why Successful Traders Use Fibonacci Retracement(s):

 

A. I'm a successful trader and I think Fib levels are idiotic.

 

B. 50% is not a Fib level.

[tmbaru 10]

The most crucial fibonacci retracement levels are 38.2% and 62.8%; others are 75%, 50% and 33%.

Fibonacci retracement is just one of the techniques used by successful Forex traders but it is not the only technical analysis strategy that can help you make substantial amount of earnings in trading in currencies.

[tmbaru 10]

To fully profit from Fibonacci retracements you need to understand other aspects of technical analysis as well.

 

The trend is your friend" - always identify the prevailing trend, and never trade against it, but rather wait for retracements and then enter trades in the direction of the trend.

[DbPhoenix 42]

The most crucial fibonacci retracement levels are 38.2% and 62.8%; others are 75%, 50% and 33%.

 

Fibonacci retracement is just one of the techniques used by successful Forex traders but it is not the only technical analysis strategy that can help you make substantial amount of earnings in trading in currencies.

 

Depends on how you want to massage the numbers.

 

Even so, your title implies that all successful traders use Fibs, and you repeat that assertion here. Since you have no evidence that ALL successful traders, Forex or otherwise, use Fibs, then the title of your article is incorrect and misleading.

 

And some may wonder why it matters. So what? It matters because beginners read this stuff and can easily be misdirected into the sort of nonsense that prompts the often-deserved derision that so many non-technicians express for technical analysis.

 

The market is not a seashell.

[MightyMouse 12]

The most crucial fibonacci retracement levels are 38.2% and 62.8%; others are 75%, 50% and 33%.

Fibonacci retracement is just one of the techniques used by successful Forex traders but it is not the only technical analysis strategy that can help you make substantial amount of earnings in trading in currencies.

 

When you get past this phase of your life, you'll realize how silly this phase was. Look forward to the future.

[pakeha 10]

The theory holds that Fibonacci is not only true in organic matter, but within the market itself, and Fibonacci ratios, more often than not, lay out of a map for retracement levels, after a significant move.

 

However there is no proof that there is in fact any relationship between what is true in organic matter and what is true in the forex market.

 

What is true is that using Fibonacci retracement in forex trading is widely promoted with Fib tools readily available in all the popular trading platforms. So the continued promition and use of Fibonacci retracement, coupled with the tenuous tie-back to "natural forces" tend to make it a self fullfilling prophecy.

 

But like most truisms in forex (e.g. the trend is your friend) its not true often enough for you to make a fortune, or even a decent living.

 

My 2 cents

[enochbenjamin 10]

Why Successful Traders Use Fibonacci Retracement(s):

 

B. 50% is not a Fib level.

 

neither are 38 or 68.

 

My son is in 5th grade and happened to be looking over my shoulder when i was reading this post. He told me we just went over Fibonacci patterns in school and quickly pointed out that the first 12 fib numbers are

 

1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233...

 

I had to double check as its been some years since I learned about these numbers, but it appears my young lad is correct.

 

this leads me to believe that fib retracements are completely made up... if I am missing something, please educate me as I am smart enough to know that I am dumb.

[YertleTurtle 10]

Your son's sequence is correct. The ratio of n/(n+1) in that sequence approaches the number that is approximated as 6.18. 33%, 50% and 75% have nothing to do with Fibonacci. I'm sure there are people who successfully trade this stuff but it annoys me to no end. Beginners seem to stumble on Fibonacci levels and treat it as the holy grail.

[DbPhoenix 42]

I'm sure there are people who successfully trade this stuff ...

 

Given the number of levels, and how far the "bounce" can be from them and still "count", it would be next to impossible not to be successful trading them.

 

Of course, it's also possible to trade successfully by putting on a tinfoil hat and receiving trading signals from Mars.

[SunTrader 10]

In a discussion of fib retracements in the forex market a chart is posted of what looks like a option on a nasdaq stock? Strange.

 

But as to their effectiveness or whether or not there are self-fulfilling as some like to say, here is a chart of the Dow from the year of the crash - 19 friggin 29, you tell me.

[enochbenjamin 10]

others are 75%, 50% and 33%.

 

These are not fibonacci ratios.It's going to be difficult to think outside the box for those who don't even know the basics.It's difficult to understand why those who don't know just 4 ratios insist on writing articles....

 

MightyMouse-"When you get past first base, you'll realize how silly this phase was. Look forward to the future.

 

(i took the liberty of adapting your comment to something more constructive:) )

Btw...it's impossible to look forward to the past;)

 

I am not here to argue the merit of fibonacci retracements - I am a scientist by education so I very much understand the concept. It is also my science background that tells me nomenclature is very important if we are to build off of previous discoveries and thus actually learn something. This is where I have a problem with the retracements - they are based on the Golden Mean of Euclid and Aristotle, the divine proportion of Leonardo daVinci. The ratio of 1.618034 from which the erroneously named fibonacci retracements are based upon, was around and used in math centuries before Fibonacci discovered his little pattern of numbers. Also the actual ratio of 1.618034 was fixed for convenience the actual ratio varies slightly based upon which numbers are used to calculate the ratio.

 

Any way, if anybody really wants to know more about the subject there are literally dozens of books on the subject. And while fascinating - fibonacci theory does not always hold true in nature - just like in trading.

 

If it works for you and you - why worry what the naysayers think.

[DbPhoenix 42]

And if you're on the other side of the fence DB,in view of your longstanding contributions elsewhere it's a little disappointing to read comments such as "idiocy" and "tin foil" hats".

Sorry to pick on you.

 

Sorry you're disappointed, but that doesn't alter the fact that I have yet to see any evidence whatsoever (other than anecdotal, which is hardly rigorous) that there is anything to this. Even the OP's own example doesn't address the topic. Rather than Forex, it's a Nasdaq stock. And price doesn't SAR at any of the levels he's drawn (though it should be noted that he qualifies his SAR by employing the qualifier "near", which also is hardly rigorous).

 

Beginners need to learn how to read charts, not to head back to the crutch store for a shinier model with New and Improved Grip Tip which is just as likely to fail as every other model they've tried.

[Seeker 11]

It's not so hard to test the merit of these. Pick one retracement, say 61.8%. Choose a non-discretionary method of drawing the fib, i.e. take the high and low from the past n days or take last week's/month's high and low. Draw the fib and investigate the distribution around it when price hits the 61.8%.

 

You may find something, may not. Never know for sure until you try. The only thing I would take issue with, is when people start rolling out comments about how the fib ratio is everywhere in nature and so applies to trading. This part is nonsense.

[YertleTurtle 10]

It annoys me to no end because of the bad math being used. 50% is not a fib level but every fib trader I've seen uses this. If their "theory" is there is something sacred about these numbers then adding a level erodes this argument.

 

Fib levels often appeal to beginners who use these levels in lieu of an understanding of market structure. There are also so many fib levels that they are always going to look appealing to a beginner. I personally believe (although I'm not going to waste time looking at it) that I could use levels like 25%, 33%, 50%, 66%, 75% etc. and these projections would look equally good.

 

Plenty of unsuccessful traders use fib levels. I know at least one institutional trader who uses fib levels so he can run stops. I always find the study of something ethereal to be a waste of time.

[DbPhoenix 42]

Like many things,you reap what you sow,and as DB has made clear he requires someone else to do that work and prove it has merit otherwise fibonacci is "idiocy".Not exactly a scientific approach to drawing conclusions is it?

 

...

 

It would also be nice if those who considered themselves experts in other areas didn't assume that automatically gives them the right to be taken seriously when they debunk something they know almost nothing about.

 

That way,maybe we could do something to stem the flow of quality posters leaving this place.Then maybe i wouldn't get pm's telling me people are"bored"

 

I don't "require" anybody to do anything, though if somebody posts an article that claims that successful traders use Fibonacci, I expect some sort of evidence to support that claim. As for proving a negative, what if I were to post a hundred charts which showed that Fib levels are completely irrelevant to price movement? What exactly would that prove? On the other hand, where are those hundred charts that prove that it does?

 

As for "quality posts", I've made my share, and thirty years of looking at charts has earned me at least some privilege in expressing an opinion regarding what is pertinent and what is nonsense. If you disagree, put me on Ignore.

[SIUYA 11]

Two books that helped me decide many years ago and i have quoted them both here.

One was "trading with the gods" - there are variations of the website around

the other was "The Trading Rule That Can Make You Rich" - Dobson

 

One is about the magic of fibonacci, and BS IMHO, the other basically telling you to wait until you have a 50% pullback of which ever direction you choose to go in before entering a trade.

Overall they tell you the same thing....one applying some magic to it, the other common sense.

The key point that anyone should take out of what ever 'idea' you like is that you work out a system that gives you a method of waiting for a trade, allowing you a way to work out if the trade is wrong, what to do when its wrong and what to expect when its right....blah blah blah - you know the stuff - a plan, structure and a method.

Its not scientific, its certainly not magic its not measurable, it requires context and discretion for when to apply it, it has some pros and cons, it sometimes misses you trades.....etc;

I like 50% which is not even a fib number, but if you use a fib number its likely you need the same thought process to make it work.

 

There is no magic number or secret sauce, nothing sacred about any number, but if you can use a number to help enter on pullbacks, and that number is a better than not number for forcing you to have some patience, give you structure and help read the market - then great. If not, move on and find something that might.

 

(I actually think overall despite the variations in opinion many are arguing for the same thing in this thread - you need more than just a set of numbers to apply to a market to money)

[DbPhoenix 42]

To see things from my point of view just superimpose your comments on the subject under my name and plant them in one of the Wickoff threads (substitute fibonacci ratios with something more appropriate).Then ask the same question-how useful is it?

 

Well, I posted three weeks' worth of charts that illustrated a method which yielded a 79% win rate and 90% profit, and the resulting NQ trade is now 200pts in profit. That's after several years of profitable trading.

 

But I guess it depends on how one defines "useful".

[DbPhoenix 42]

Do let me know folks if i go off topic and we'll get back to the important matter in hand,..deciding just who has got the biggest cock here.

 

I don't think there's any doubt about that.

 

Continued success to you.

[BlueHorseshoe 10]

There are three types of horizontal lines that one can draw on charts:

 

1) Lines based on price - eg traditional support and resistance levels or consolidation zones (try Auction Markets).

 

2) Lines based on mathematical derivations of price - eg fibonacci levels or "daily pivots" (try Red Team, Green Team).

 

3) Lines partially or wholly based on or derived from non price data - eg MP points of control or VWAPs (try Trading with Market Profile)

 

All three are also well covered in various other threads around the site.

 

Best wishes,

 

BlueHorseshoe

[SunTrader 10]

4) Time based support and resistance.

[onesmith 10]

There are three types of horizontal lines

 

How many of the various types of horizontal lines are dynamic? How many are static?

[Seeker 11]

That is a start but it is first base stuff (imo).You would expect a non trader to set about the task in the way you describe.And it is non traders whose papers are held up as "proof" that there is nothing to see here.Not suggesting anything regarding your trading ability Seeker,even your handle suggests an open mind.

 

I have sympathy with your 2nd paragraph,but ultimately it's a red herring in any case.Knowing how rabbits multiply isn't going to help me extract money from the market.

 

You mention higher timeframes which,as for other methods,tend to produce better results but what about context?

 

If a market is slowly grinding up with shallow pullbacks with an average daily range of 10 points then 0.618 isn't going to be touched;it is more likely 0.236.

A deeper pullback tomorrow may be seen as a result of change of context.So you don't need to trade fibs to make use of the information they can give..

 

DB places importance on reading the chart,that encompasses reading a market.Can a new trader investigating fibs read a chart/market? .Can most of the people writing papers and debunking fibs read a chart?

 

Retracements are only one part of fibonacci.What about extensions?

Analysis is one thing trading is another.Are you going to enter on a retracement (which you don't know for certain will be support) or exit,in which case you don't care if it holds there or not?

Do you place limit orders at fib levels or wait to see how a market reacts there before placing a trade?

 

We all know that what many are looking for is a method that will tell them exactly where to enter/exit and work 90% of the time,and if fibs don't give them that then fibs don't work as far as they are concerned.

 

Then there are those who say,well in hindsight i see a lot of fibonacci but hindsight isn't much use.Well,that's a problem for the trader,and is hardly "proof" that they don't work is it? In fact if they can be seen in hindsight....

 

I've never seen my car drive itself.I don't know about your car,but i suspect,like mine,it isn't much use unless you drive it yourself.

 

The level of debate here is akin to expecting the fibs to do the work for you.That is my real point,'cos obviously i'm not really concerned with some other guy's trading results.

 

Like many things,you reap what you sow,and as DB has made clear he requires someone else to do that work and prove it has merit otherwise fibonacci is "idiocy".Not exactly a scientific approach to drawing conclusions is it?

 

As Seeker suggests,do the work yourself,draw your own conclusions.It would just be useful (to some) and in keeping with the idea that a trading forum is there to give some pointers,if we didn't have to run the Groundhog Day paradigm every time someone writes an article as useless as this one.

 

It would also be nice if those who considered themselves experts in other areas didn't assume that automatically gives them the right to be taken seriously when they debunk something they know almost nothing about.

That way,maybe we could do something to stem the flow of quality posters leaving this place.Then maybe i wouldn't get pm's telling me people are"bored"

 

I agree with most of your post and I agree it is first base stuff, I disagree that it isn't the first thing a trader should do. If one does it, and suppose one finds (for example) that there is no edge in fibs themselves as an entry alone, then that will dispel all sorts of myths around them, and it will be clear that they don't work in isolation and then one can get down to the nitty gritty of context and trade management and whether they're useful in combination or as some sort of guide to these. Just my 2 cents

[zdo 20]

Skimmed some earlier posts… and as a beginner, the first ‘thing’ I was ever really into in trading was fibonnaci !

lucas quickly followed… then modified gann angle clusters… then…

 

Actually, the really first active interest was fib time projections! Exciting, fun, and episodically successful. Working deeper and deeper into that ‘episodically’ is what made my trading career.

 

learning to “read charts” (like wak off, et al) occurred on a wholly asynchronous process, via different learning and work modalities

(… this is partly what mit is ‘seeing’ and commenting about re db’s ‘intrusions’… and it’s questionable that db understands this…his content doesn’t indicate he does…)

[zdo 20]

A ‘real’ fibonnaci trader talks

[ame=http://www.youtube.com/watch?v=soynQs8qxCA]Mark Douglas - MIND OVER MARKET (Full Interview) - YouTube[/ame]