Question on using Fibonacci Retracements

Discussion in 'Technical Analysis' started by arzoo, May 24, 2004.

  1. arzoo


    I've read a lot about trading pullbacks based on fibonacci retracements and have ssen a lot of samples and also observed them occur in real time.

    However, I've long been wondering which level will be the ONE off of which the price bounces or retraces from?

    In short, what entry signal tells you that it is the 0.382 level the market will retrace to then go forward as opposed to pulling to 0.50 or 0.618 before heading back with the trend?

    As always, thanks for the help!
  2. pspr


    One never knows which fib price might bounce off of, if any. Look for fib clusters of the three numbers you mention using levels within levels. Also, watch the .786 closely.

  3. BSAM


    If you EVER figure that out, please let me know. Fibos are VERY unreliable, IMO. If you insist on using them, make sure you have other good reasons for executing an entry.
  4. Can't be done. Counting bars (using Fibo numbers, Lucas numbers with forex) goes some way to determine 'that' wave is complete. ABC Corrections and Retracements may have typical lower/higher C wave, be a horizontal formation, or in strong moves be a 'running' formation where B and C look like Impulse waves rather than a C/R (DJIA 87/90 formation). Channels and fibo fan may also help as well as using more that one timeframe.
  5. When I use fibs...which is a minority of the time:

    1. look for a cluster of 3 or more (as mentioned above)
    2. wait for confirmation (price to move in the expected direction)
    3. view it is a form of establishing risk/reward parameters rather than predicting where price will go. In other words...if I enter in this fib zone and put my stop below the zone...and a fib target lies above, what is my risk/reward...does it meet my requirements...
  6. I learned about Fib retracements through a trading course I took, which relied on them heavily. I spent alot of time studying charts and sim-trading in playback mode, and marvelled at how accurately Fibs predicted price movements. The problem came when I actually tried to trade them live, and experienced the same quandary that you posted: which number do I use, how do I know if the level will hold?

    The conclusion that I came to is that Fibs alone are a low-probability indicator, and should only be used in conjunction with other signals. I have basically stopped using them altogether, and only casually observe them now out of the corner of my eye. While at times they can be spot-on in predicting a reversal, there are just as many, if not more, that fail.

    One method that worked to some degree for me, as was mentioned before, was looking for clusters. If there was a fifty percent level of a small move that coincided with, say, a thirty-eight percent level of a larger move, there was a better chance that the levels would hold. This was the only way that I had any success using them.

    There may have been a time or times when Fibs were more accurate, but the market climate over the last year or so has renedered them almost useless, IMO. I'm sure we'll hear from others who disagree, but this is my experience.