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

I tend to agree with you

I was trying to establish a set of rules for people who might want to backtest so as to obtain a baseline.

 

The structure of the sequence is ingrained in nature, just like fight/flight reponse to fear/greed. Except for an enlightened few, the average Neanderthal has'nt evolved much, so his/her response is still close to natures constructs. That and fact that the pit traders lean heavily on fib projections taken from prior days numbers.

 

While I would like to just let this slide, I guess I have to say something here.

I have to admit that I haven't been on the MERC floor in years. But I still know 10 or 12 traders who work in Chicago and none of them use Fibs. By and large they make money working the order flow.

The idea that fibs have some "force of nature" thing going on is romantic and mildly interesting, and who am I to say it ain't so, but the rest is kind of stretching it a bit.

Sorry

 

The market is a complex system, and the realization of the true nature of Fibonacci studies as a “self-fulfilling prophecy” (well, at least to a great extent it is so) will help you use the tools more efficiently. How? Very simple –it will help you avoid any perilous over-reliance on them. Your trading will become more versatile and, thus, more efficient.

The Fibonacci method should be used in a combination with other methods, and the results derived should be considered just another point in favor of a decision if they coincide with the results, produced by the other methods in the combination.

And that’s when the magic will begin to work.

http://tradecision.com/support/Fibonacci.htm

 

Probably no different than others, but I've used fibs at one point. How do you backtest them? I'd venture it's an elaborate process to create some kind of script to do that. Anyway, I've simplified the process by focusing on risk/reward per setup along with risk & money management.

Re: floor traders, I agree it's the order flow more than anything else. Steve, your insights are always appreciated.

Cariocas

 

There is a fair argument that Fibs are a valid natural pattern which tend to also occur in markets more often than not.

Like most of the posters here, I think they are useful, and should be paid attention to but not at all any kind of support/resistance level to hang your hat on without any further thought.

I personally think that they are worth using in your TA because a) there is fair merit to the theory that we are attracted to seeing (and creating) patterns of specific ratios, whether we are consciously aware of this or not and b) if every schmuck thinks there is a level at price xyz, then there is a level at xyz. Doesn't matter whether it would exist or not without a belief in the Fibonacci level, it can be the definitive self fulfilling prophecy.

For any Bund/T-Note futures daytraders out there, try imposing fib levels on 1 or 5 minute candle charts following NFP figures. You will find that the majority of the time, the move has retracements/extensions that bounce off Fib levels spectacularly well. Obviously it can be a bit tough to trade off technicals in the madness that follows NFP, but if you have CQG or similar software, it need only take you 5 seconds after the first major move is over to set this up.

Surely, this adds some merit to the idea that we have some subconscious attraction to moving markets around at these ratios- I doubt many people care for technicals in the immediate aftermath of a big figure, so the fact that these patterns form without consciously looking for them adds food for thought.....

If you are interested in the true history and theory behind Fibs, I have attached the following document which I'm sure my old boss would be thrilled to know I have offered to you all for free! I have had to cut a great deal of the content out as it is too big a file for ET. If you really want the full copy, you could PM me

 

As the market takes its daily random walk it will occassionaly pass through fib levels and react in accordance with your plan. Just as often, it(the market), will completely ignore your system. There are any number of systems that can be profitable with proper money mangement. That, in my mind, is the key to trading success. Most people don't have deep enough pockets to survive the drawdowns that come with every system. The best system is the one that's well capitalized to begin with. Something I had to learn the hard way.

 

Point of belief, not unlike Jack's.

Capitalizing beyond the system's requirement is absolute waste. In this sense "well capitalized" is meaningless. Your statement is likely indicative of the lack of any system at all.

 

Fibinachos are only for eating - nothing else!

 

I find that Moving Averages set in Fib numbers are useful.

55, 89, and so on.

Here is an example, the recent SPX daily chart, set with SMAs in Fib numbers.