Fibonacci - How does it work - Does it really work?

Discussion in 'Technical Analysis' started by nlslax, Feb 6, 2006.

  1. nlslax


    I hear alot about using Fib levels to determine pivot points.

    A trading buddy of mine and his mentor swear by them. They trade FX exclusively and trade successfully using only Fib levels.

    Is it worth the time and money to learn?

    Is Fibonacci over or under rated?
  2. If you don't mind I would say a couple of things quickly.

    First, I think there is a good mathematical basis for pivots. They represent an average of sorts and because other market participants use them, they tend to work in a way analogous to a "self fulfilling prophecy".

    Although I don't find the same utility in Fibs. I understand the claims for their use. Unfortunately I have never read a good or rigorous study that mentions them in a positive light. On the positive side, many people use them, so when they work, I will bet that again it is because of "self fulfilling prophecy".

    At this point in life, I figure that a significant amount of value for these tools comes from the psychological comfort that they give traders. All of these tools seem to provide some kind of psychological crutch to the user at first. What I see however is that the longer a person uses them, the more "realistic" they have to be about their accuracy. Neither tool works anywhere near 100% and after a while this causes the user some anxiety and this is probably why inexperienced traders get to a point where they are hesitant to take signals.

    So I think you have to put these kinds of trading "aids" in perspective, and the way you do that is to learn as much as you can about them (before trading with them) and observe how they act in a variety of circumstances.

    Hope this helps someone.
  3. nitro


    I think that is a great post - it blends all that trading is into a succint post, the value of which has nothing to do with the original question!

    But very few will understand its meaning until they actually know what trading is about. And even when traders do find out and finally become consistantly profitable, few can put the realizations into words of what they understand about trading profitably, and is somewhat cryptically embedded in your post on many levels.

    Metatrading, or the reflective study of the effects on self of making decisions during trading, and what works and why and on what level in regards to self, is a critical skill to learn in this business.

  4. Fibonacci is the way things grow.

    It can discribe the growth of sea shell chambers, or the growth of a galaxy.

    Its described by some as the "Natural Ratio".

    Technical Traders use it to predict price targets and pivots, and if you use it properly you can trade with about 70% confidence that a trade will work out according to retracements or extensions that reach Fib ratio lines.

    At least thats the way my mentor was taught and he was taught by a successful London Currency Trader.

    Then others will say they tried it and it helped them Lose money.
  5. Anything may appear to sometimes work for some time for some people. Has nothing to do with 'mathematics'.
    If you are in a hurry, you'll have to look for much better.
  6. TylerSJI


    Fibonacci, and 13th century Italian, made these numbers based on the breeding rates of rabbits, I've read. How these got brought into trading to a decimal point is a great testament to man's gullibility.

    As far as the results of the people who use it, I'd fade it; 1) people who use Fab retracements are the type that often employ a dozen other things as well which will affect their trading (although I understand that in your case this was not so) and 2) if it does tend to work by itself I think it's due to the fact that buying at retracements is like buying on dips in a strong, long uptrend or visa versa for shorting which is a classic and proven way to make money.

    Just like how price sometimes bounces off of trendlines because of the increased buying pressure from the people using those technical signals, I could see this working with Fab levels. That being said, I prefer to ride with fundies not technicians: if a chart is being held up because of technicians and something goes wrong, it can break hard as their aren't value-conscious buyers to provide support.
  7. Fib is basically 'Golden Ratio'.
    Golden ratio appears among many complex-systems and it considered as the most beautiful ratio in universe.
    Since the financial market is a comlex-system, the golden ratio appears.
  8. I don't mind people refering to Wikipedia as long as they understand the limitations. You appear not to understand them.

    If you will do a little background on "Wikipedia" you will start to put this into a proper context.

    Thank you,
  9. Applied to Price Movement, the fibonacci ratio is an 'elastic measure'; when the ratio is applied to the W0-1 — usually always a different LH/HL amount, the ratio while remaining the same provides 'correct' price Projections/Corrections/Retracements amounts/levels/targets based on 'that' W1.

    From the point of view of the 'analysis' of a particular Price Movement, the fibo tool is extremely accurate in that prices appear to react/interact with various fibo levels rather than not, and will work on any timeframe.

    From the point of view of trading, the fibo tool isn't required tho it may form part of a trader's method/system.

    The following thread has some fibo sites that may be useful:

    The attached pdf has some statistics regarding some fibo Relationships based on the author's experience — Marc Rinehart using the Advanced GET program.
  10. toc



    If your dick is .618 the size of your palm then Fib should work.:D :D :D :D :D :D
    #10     Feb 7, 2006