Why Successful Traders Use Fibonacci Retracements

[Diva 10]

Support and resistance levels can offer strong Forex entry signals when the price breaks through an established level, as when this happens the price has a tendency to continue moving in that direction.

Though, S&R levels and Fib retracements are both powerful trading tools individually, when you combine them together the trading signals become much stronger and more reliable

[M.A 10]

Article can be rated as informative But the topic is misleading. I wonder why some senior forum members are debating and writing long essays on it. All debate so far is ....... :spam:.

[dasziel 10]

Fibonacci levels are idiotic as depends from where you want to measure the retracements.

 

You always find a fib level which fits your trade.

[TimRacette 11]

I think a lot of people *including myself at first) get caught up in entering the trade. Finding the perfect indicator or retracement when really all of those indicators are just signals. Getting in the trade is the easy part. Adhering to an exit method that is consistent regardless of what the market does I've found to be much more important.

 

Knowing your expectancy is the most valuable calculation you can make.

[zupcon 10]

 

The market is not a seashell.

 

Most things that occur in nature that are commonly used as examples by these charlatans don't actually conform to Fibonacci ratios either !

[SunTrader 10]

Most things that occur in nature that are commonly used as examples by these charlatans don't actually conform to Fibonacci ratios either !

Can you provide specific examples -

 

such as which are not found in nature and which charlatans are making the claim?

[zupcon 10]

Can you provide specific examples -

 

such as which are not found in nature and which charlatans are making the claim?

 

http://www.lhup.edu/~dsimanek/pseudo/fibonacc.htm should get you started

[SunTrader 10]

Fibonacci Flim-Flam. should get you started

I'm not looking to get started.

 

The link only points out some of the false claims. I could pick apart some of the points made there if I wanted to kill some time.

 

BTW both fundamental and technical studies are full of false claims as well.

 

Science itself has had many things once thought to be true that are no longer or were outright exaggerations.

 

Fibs are just numbers after all but as I think I have posted previously numerous times on TL a Dow chart from the 1920's showing their effectiveness long before the crowd "discovered" them.

 

And others criticize them.

[zdo 20]

http://www.lhup.edu/~dsimanek/pseudo/fibonacc.htm should get you started

 

The mind is trapped in form.

If those ratios weren’t there, it’s not likely ‘we’ (Leonardo Pisano (who wasn’t really the first to discover fibs, etc), et al) would have ever ‘seen’ them…

 

Probably never realizing it - even to this day - Donald E. Simanek did not write a paper about the ratios. He wrote a paper about misguided ‘mystics’ still looking for the ‘formless’ in form… desperately looking for a language in the 'numbers' …

and they find it… but they find in it an incomplete symbology – like all languages …

He wrote a paper to desperately make sure he didn’t make the same mistake…

 

...and you might just be using that link to 'throw the baby out with the bath water'…

 

 

In the markets, pure fibs sequences are the exception... exclusively focusing on 'fibs' , instead of the current dominant ratio 'cluster' (which is transitory and lasts... until it ends)

yields tradable 'precision' about 5% of the 'time'...

[Seeker 11]

I'm not looking to get started.

 

The link only points out some of the false claims. I could pick apart some of the points made there if I wanted to kill some time.

 

BTW both fundamental and technical studies are full of false claims as well.

 

Science itself has had many things once thought to be true that are no longer or were outright exaggerations.

 

Fibs are just numbers after all but as I think I have posted previously numerous times on TL a Dow chart from the 1920's showing their effectiveness long before the crowd "discovered" them.

 

And others criticize them.

 

You could go back to a 1920's chart of the DOW and say buy and hold is pretty effective too.

[SunTrader 10]

You could go back to a 1920's chart of the DOW and say buy and hold is pretty effective too.

If you hold ............ long enough anything works.

 

But fibs are about price and .............. time.

[zupcon 10]

I'm not looking to get started.

 

The link only points out some of the false claims. I could pick apart some of the points made there if I wanted to kill some time.

 

BTW both fundamental and technical studies are full of false claims as well.

 

Science itself has had many things once thought to be true that are no longer or were outright exaggerations.

 

Fibs are just numbers after all but as I think I have posted previously numerous times on TL a Dow chart from the 1920's showing their effectiveness long before the crowd "discovered" them.

 

And others criticize them.

 

The problem is we can generate 2 numbers in the range 1 to 100 and use those numbers as the basis of a moving average cross system, and I'm pretty confident that I could find a financial instrument somewhere that could be traded profitably using such a system

 

Of course I could equally well find you hundreds of markets where the same system didnt work.

 

There are so many variables that fib traders simply will not address in a systematic manner. Charts themselves are simply an arbitrary construction, and that's before you even start to apply any sort of TA. What exactly constitutes a swing high, swing low etc.

 

I'm not saying fibs are not useful, I've got mountains of statistical data from years of studying these things, but the numbers and levels themselves have very little to do with profitable trading,

[M.A 10]

If numbers and levels have very little to do with trading then what else matters the more than them?

[steve46 12]

There seems to be a natural human tendency to look for formulas that obviate the necessity to "think" and make independent decisions (to let the formula do it for you).....

 

So many threads on this site incorporate the word "successful"......and once again the same tendency comes to light.....if only someone can identify a formula that all (or many) successful traders use, then I will not have to think.....I can simply use those rules to make money.....Its called infantile or adolescent self esteem......

 

In fact, "success" is in part the ability to tolerate the stress and ambiguity of the market and still develop a profitable trading plan....my colleagues do it in several ways, the most popular is NOT to use Fibs, but to analyze the way a target market acts.....example

 

Instead of blindly using fibs to trade pullbacks in an uptrending market, you characterize the average size of pullback in your market.....and vice versa for a down trending market.....if it happens to correlate with a fib number....fine....AND THEN

 

instead of blindly throwing a contract at the market because it happens to pullback a certain distance, again my colleagues would develop a secondary non-correlated data point to help them determine whether or not the market is likely to resume its trending behavior

 

These are behaviors that adults who are professionals use (instead of fibs) and although they require more commitment and work, the result is that they have an actionable plan that can be used with confidence......and the logic can be extended to other markets....

 

Good luck

[zupcon 10]

Unless the trader himself concludes otherwise.Your statement is an opinion,not a fact.It does not matter to anyone else how much research you did.The only research I trust is the research I did myself.

-----------------------------------------------------------------------------------------------------------------------------

 

Discussing anything on a typical trading forum is always going to be problematic because there's a significant number of people who are looking for simple rule based solutions.

 

In order for this group of people to accept that "fibs work" you"ll need to come up with some fairly well defined back testable method, but of course, the moment you do that, you have the same curve fitting bias that I described in my moving average cross example, and the more degrees of freedom you introduce the worse its going to get.

 

On the next level, you have a smaller number of people who have started the process of trying to figure things out for themselves. These are the kind of people who might ask the question "do markets turn at fib retracement levels more frequently than for example levels chosen at random" or "do swings terminate at fib extension levels" and they might research this stuff at various levels of sophistication.

 

This is the sort of stuff you'd typically see in academic papers, inevitably the stats indicate that markets are no more likely to turn at fib levels than any other level, (despite the fact that I could immediately look at a chart and pull out hundreds of examples where they did). Although its interesting, its not really got a great deal to do with the subject of making money, its just one tiny part of a much larger whole

 

There's an academic paper floating around written by a couple of HSBC researchers who looked at fibs, and another looking at the accuracy of support and resistance levels quoted by various banks. If you look at those papers, the research methodology is perfectly well laid out, unambiguous, no room for misunderstanding etc. the results are crystal clear too. Those results arnt opinion, they are verifiable facts, and if you ran the same experiment you'd get the same results too.

 

You might not believe it, but I trade using completely random entries, but I could do the same thing using fib levels, and I'd get the same results, and I'd get the same results whatever I chose to use to select levels.

 

I'm not trying to discount fibs, they have the same strengths and weaknesses as any other TA,

[SIUYA 11]

Zupcon - one of the problems with academic papers is that they apply the simple rules based systems that many traders look for.

So in order to test something does not work academics seem to often fall into the same trap many novice traders do.....and then hence declare it does not work....

Great if you are looking for a purely systematic system....or for laws of markets.

 

It does not mean a model/a structure for looking at the markets is valueless.

 

I think Mitsubishi is saying much the same thing as you are - there is more to it.....and simply applying X must happen when Y occurs is only the first step in trying to read a market and then manage a trade.

 

To me using fibs gives a pretty good platform from which to view the markets ( I prefer 50%) and then you have the issues of asking - how it got there, whats the context, do i need to rush in, what happens if this occurs, when will i know I am wrong.....it gives a structure rather than just having random entries.

 

Now if I am wrong on this and Mit thinks there is something more mystical about it well then I need an emoticon that shows me eating a hat.....

 

If you find the HSBC research paper please post it (I am a bit lazy today) thanks.

[zupcon 10]

Zupcon - one of the problems with academic papers is that they apply the simple rules based systems that many traders look for.

So in order to test something does not work academics seem to often fall into the same trap many novice traders do.....and then hence declare it does not work.....

 

I agree, there are some truly shocking examples of this, particularly in the area of artificial intelligence research. I suppose its not surprising, the people writing this stuff are not traders.

 

As a general rule, any academic paper that defines success or failure as a function of how much money a "system" gains or loses is probably not worth taking the time to read, and its a bit of a give away that the authors don't really get it.

 

Most of the better quality papers ask a question such as do reversals tend to occur at fib levels, or are markets equally as likely to reverse at arbitrarily selected levels. Even that approach is rather simplistic.

 

I read quite an interesting paper a few years ago where a couple of academic types tried to identify swing points algorithmically as the first stage of calculating fib levels. These guys had access to "traders" working within the same company, and of course, the traders always tended to disagree with the location of the mechanically identified swing points.

 

Eventually, these guys came to the conclusion that designing a mechanical method of identifying swing points was far more complex than they'd anticipated, and so they decided to skip that step and ask the traders to manually mark the swing points on the chart.

 

So a trader marks the swing points, they do the analysis and conclude fibs are no more significant than a randomly chosen level. At this point, the other traders claim that the swing points picked by the first guy where wrong.

 

So they get another trader to pick where he thinks the swing points are. They repeat the experiment, and get the same results

 

No matter which human trader selected the swing points, they always got the same result

 

Lets not forget, these guys where retrospectively cherry picking with the benefit of hindsight and they still couldn't make it work. In practice, the firm was using fib levels in their analysis and making money.

 

In the highly unlikely event you where a trader in this firms employment, and you'd developed an edge based on something as trivial as fib levels, I suspect you wouldn't be too keen on disclosing details to someone whose job was to encapsulate that knowledge into a few lines of code.

[SIUYA 11]

great points zupcon.

I often think that either good traders dont know what particular reason is behind them making money.....rather than them willingly hiding the truth.....and maybe its a combination of many factors that is hard to pin point to just a simple entry exit rule.

No trader is likely to reveal his secret recipe especially if it seems either extemely simple - they will be thought of as redundant, or extremely off the planet - they will be thought of as a loony and easily dismissed when having a bad streak. (From memory there is an interview in Market Wizards where by a trader does not disclose too much for fear of being thought a freak)

 

The flipside to your post is those models that do make money in theory and yet blow up in reality.

[SunTrader 10]

.......

I read quite an interesting paper a few years ago where a couple of academic types tried to identify swing points algorithmically as the first stage of calculating fib levels. These guys had access to "traders" working within the same company, and of course, the traders always tended to disagree with the location of the mechanically identified swing points.

.......

 

Tom DeMark found the same thing when he asked traders at his workshops to draw trendlines and got all kinds of variations.

 

And basically the reason why he came up with his trendlines "rules" - especially that they be drawn from swingpoints right to left and not the traditional left to right.

[ctrlbrk 10]

especially that they be drawn from swingpoints right to left and not the traditional left to right.

 

Can you go into more detail on this?

 

Sent from my Nexus 4

[SunTrader 10]

Can you go into more detail on this?

 

Sent from my Nexus 4

 

[ame=http://www.youtube.com/watch?v=We-xxv2eOdg]Thomas DeMark: Trend Lines - YouTube[/ame]

[johnw 10]

Trading is one of those things that is simple and yet hard to do

... it is made hard to do because it is simple

... and the more complicated it is made then the more impossible it is to do.

 

IMO the 'simplicity' of trading lies in getting to the bottom of understanding

what makes prices move .... everything is based upon the auction process,

because without it there would be no market .... it is pure and that is where

it's simplicity lies....

when there are no more counter parties at a price level, then price moves to the next level.

 

If a Trader thinks that they understand this process, then they are doomed.

Only when they know that they know how price moves then can they move on to making money consistently.

 

Now let us move on to Fibs ... firstly the midpoint (50%) of the last price wave is important.

This does not mean that price will always hesitate at this point ... but it often does.

... too often to ignore in fact.

We all seem to understand that 50% is not a fibbo, but it seems to crop up in every fibbo thread ... I find this curious and disturbing.

 

We all seem to understand that price waves are not a precise science ... so imagine what happens when price approaches 50% and shudders under the impact of the Asks and the Bids as Traders fight out the next move ..... will price continue .. or will it turn thus ending this price wave.

 

Traders give this battle the title of 'consolidation' and define it by an upper and a lower point (the points turn into lines if the battle continues for a few bars or more.)

 

The upper and lower lines/points will be a few tics either side of the 50% line

and can easily be around the 40% and 60% mark of the previous price wave ...

in fact you could call them 62 and 38% ... or why not call them 61.8 and 38.2%

after all this is not a precise science.

 

 

If your understanding of price movement is more or less as I have just described

then I ask you ... what have fibs got to do with the trading auction process?

Edited June 30, 2013 by johnw

[johnw 10]

Zupcon-some good points made.

 

Johnw- "If a Trader thinks that they understand this process, then they are doomed"

 

Why? ............................................

Edit: jw knows i'm only kidding around.He can testify that he has had a good look under my hood a long while back on one of Randes' threads and will confirm there is nothing malicious there.

 

gm Mitzy,

 

If a Trader thinks that they understand this process, then they are doomed.

Only when they know that they know how price moves then can they move on to making money consistently.

 

Now here I am thinking just how far you have come since our wee chat on Rande's thread and now you go and spit the dummy on me....

 

disappointing Mitzy ..very very disappointing indeed.

[SunTrader 10]

Few too many words in that line.

 

Anytime you know something, by definition you know you know it.

 

D. Rumsfeld

 

Known knowns, known unknowns, unknown unknowns.

 

Ya know!

 

[Stefan 10]

Take any 2 random numbers (e.g. 1.88 and 4.57), keep adding, and you will get after a while this silly ratio that works only in books.