Newbie Fib question..

[DionysusToast]

That's good of you - this could easily turn into a ****-waving contest which would distract from the point.



Yes I have - albeit not the specfic combination of techniques I use now. The tests I have performed previously were using several individual componenents of my current methodology and without fail, they worked better when combined with fibs than when traded blindly. I also have trade logs going back years which prove to me in black and white that the trade signals I generate are more effective when combined with fib levels than when not.



True enough - but without the information provided to me by the indicators I use, it would be impossible to trade the way I do, and hence the bills would probably go unpaid See that's the thing - I'm more than happy to accept that there are many traders out there earning a good living without even a chart, let alone an indicator or two. I'm not quite sure why you're so unwilling to accept that the opposite can also be true?



Who said they were magical? You have an odd habit of putting words in people's mouths. I've never once said they are magical or that they are the holy grail - I have merely stated that in my extensive experience, they can form a consistently effective part of a trading strategy when used intelligently. Same goes for MA's, trendlines, even pivots. I can demonstrate more examples of the effectiveness of fib levels than you could reasonably ascribe to chance, and I therefore disagree with your statement that they are "nonsense".



Is any of the above more relevant than the question - can they be demonstrated to be effective on a regular basis? Like I say, I HAVE tested comparisons between trades with fibs and without - fibs were, without question, more effective. I'll have a root round my old PC and see if I can dig out my spreadsheets...



Absolutely - sometimes they are, in fact it's something I count on a lot of the time. Sometimes when I see the suckers getting in on a 50% retrace it's like shooting fish in a barrel - but there are sucker fibs and there are effective fibs. I think most people fail to realise that not all fibs are alike, nor do they all have the same probability of success. It's like the MACD example I mentioned. Trade every cross and you'll get slaughtered. Trade those with trend and you'll probably do a little better. Trade those with trend and in rising volatility and you might do better still, etc...

To be honest DT I think if you spent a day in my trading room, you'd probably have some sort of seizure when presented with all the oscillators/MA's/channels/fibs etc BUt still, as long as everyone does what works for them...

You fail to understand 2 basic points here.

1 - I do look at Fib levels myself
2 - I am not saying that you don't use them in your trading and I am not saying you are not profitable

I am just saying that the concept behind Fibonacci is total nonsense.

This seems to be confusing. How can I use something I think is total nonsense ? How can I totally accept that you use something to trade off yet still know it's total nonsense ?

The fact is, you could get down on your knees and pray before every trading session and then say that this is the reason for you being succesful. In my opninion this would also be nonsense.

If I came up with a new trading technique based on the patterns in the water lilies in the local temple, you'd think I was mad. If I came up with a technique based on astrology, you'd think I was mad. I could show you years of results of my water lilly and astrology technique and you would tell me (as I am telling you) that the astrology and lillies had very little to do with my success and in fact - something else was making me succesful. You might even say that with my water lilly andastology technique, all I was getting was the CONFIDENCE TO ENTER a trade and that my own good sense in managing that trade was actually the key to my success.

So - when someone comes along and is using a set of numbers defined by some Italian Mathematician in the middle ages, a set of numbers that can be seen in the fruitlets of a pineapple, the leaves on a stem, I'll tell that person it's the same thing.

There's nothing wrong in all of this. It is our nature to ascribe cause to effect, just as it is our nature to want something else - be it an indicator, fib level etc to define points of interest on our chart to absolve us of the responsibility of making a decision. Perhaps the ONlY thing that fibs and indicators are doing for you are allowing you to enter the market without hesitation.

Otherwise, there really is no relationship between the markets, leaves, artichokes, pineapples etc any more that my "water lilly and astrology" method.

No relationship has ever been explained or shown through rigorous experimentation.

 

[DionysusToast]

To the OP,

You've had a lot of contradictory replies. Unfortunately, everyone is right and everyone is wrong.

Fibs are another tool that you can use, no more no less. Personally I don't use them but I do know people who do, with success.

In my opinion (and it is only that) fibs should be treated as a relatively minor element of your trading. However, the only way to determine their usefulness is to try them and see if they add anything to your trading. What works for you might not work for me and vice versa.

For what it's worth, I would pay more attention to:

Area - round numbers and pivot zones.

Candles / Bars - Pins, engulfing bars.

Hope this helps.

William The Conqueror

I don't think there is contradiction.

I say - "use what you want"
I say - "I have no issue with someone using fibs claiming to be profitable"
I say - "I have no issue with someone claiming their lucky shirt makes them profitable"

In the same way you could never hope to explain WHY your lucky shirt works, no-one can explain why these Fibonacci levels "work" for them.

My explanation that it is merely a mental crutch is a lot more believable than the "it just does" explanation bandied about these sites.

 

[William Waller]

I don't think there is contradiction.

I say - "use what you want"
I say - "I have no issue with someone using fibs claiming to be profitable"
I say - "I have no issue with someone claiming their lucky shirt makes them profitable"

In the same way you could never hope to explain WHY your lucky shirt works, no-one can explain why these Fibonacci levels "work" for them.

My explanation that it is merely a mental crutch is a lot more believable than the "it just does" explanation bandied about these sites.

Didn't mean that, simply that to a new person it can be difficult to understand how one person can swear by something, another swear at it, and both be right. It takes a while to grasp this concept which is a shame because it's fundamental to one's success.

William

 

[DionysusToast]

Agreed Bill...

I think people underestimae the benefit of having something to 'lean on', something to take some of the fear out of entering.

The thing you lean on can actually be total nonsense but if it works for you, you get in in a timely manner without waiting for all sorts of confirmation, you get out if it's not going your way, it's ENTIRELY possible the thing you lean on has no benefit other than in making you hit the button.

The problem of course, is that if you actually proved to someone that they were relying on a mental crutch, their trading could go to cr@p after being told it is just a crutch.

 

[William Waller]

Agreed Bill...

I think people underestimae the benefit of having something to 'lean on', something to take some of the fear out of entering.

The thing you lean on can actually be total nonsense but if it works for you, you get in in a timely manner without waiting for all sorts of confirmation, you get out if it's not going your way, it's ENTIRELY possible the thing you lean on has no benefit other than in making you hit the button.

The problem of course, is that if you actually proved to someone that they were relying on a mental crutch, their trading could go to cr@p after being told it is just a crutch.

I think there's a lot of truth in that. At the end of the day (and I'm not having a go at anyone, because I've been there), the question "Does XYZ work?" is really meaningless, because the answer is always going to be "It depends".

All of these things are just tools, they can help you if you apply them correctly in the correct situation. Would you say a saw doesn't work because it wasn't helpful when you were trying to change a light bulb?

If you achieve your goals in trading, then your method works. If the only benefit in something is that it helps control your fear, well as you say that could be more than enough.

William

 

[DionysusToast]

Sure William - but the question you need to ask after "does it work?" (if you are an anal retentive like me) is - "does it work better than something assigned randomly ?".

The answer will often be no, but testing is almost problematic because removing the crutch cannot easily be done without the traders knowledge.

The best questions then, for those of us who like to look into these things are "why does it work?"

 

[William Waller]

Sure William - but the question you need to ask after "does it work?" (if you are an anal retentive like me) is - "does it work better than something assigned randomly ?".

The answer will often be no, but testing is almost problematic because removing the crutch cannot easily be done without the traders knowledge.

The best questions then, for those of us who like to look into these things are "why does it work?"

Oh absolutely, I totally agree with that. I basically use price action and nothing else, but that's not really the whole story. What I've tried to do is learn and understand what is causing the action we see on the charts. Now I think I understand it (whether I actually do or not is another question), but if I didn't I wouldn't have the confidence to trade it.

For example, a pin bar is obviously one of the classic reversal signals, and represents a sharp test of an area followed by a rapid rejection. But say you get a small pin late on a Friday, I immediately think profit taking or just people covering their positions going into the weekend. Now, that could be wrong and that tiny pin could be the start of the next multi-year trend. But that kind of thinking (trying to understand what might be going on underneath the chart) keeps me out of a ton of bad trades, and helps me formulate my management plan.

Hence the reason that fibs and indicators don't work for me. I don't have confidence in them because I don't understand the rationale behind them. If I did, it might be different, without any change in the indicators themselves.

William

 

[Hilarymannah]

I'd agree that most elaborate indicators are curve fitting crutches, to alleviate the uncertainty in a conflicted mind.
Charts are just "forms", constructed from an abstract idea, which of course facilitate the overall pattern of human behavior in the conquest of profit.
As the years have progressed, so have the myriad of ways in which folk can deduce "their" own ideologies from reoccurring events ,.
As someone once said,..KISS (keep it simple stupid)
Go with the price and it's action,..and you'll always be in the black! ; )

 

["D"]

Very well stated Hilarymannah.

DT, I have a couple of question for you.

1. I used trend lines and barriers as an example of having a lot of lines on a chart in a previous post on this thread. Trend lines and barrier identification is done differently by different traders and can be quite random. This is not any different than drawing a lot of Fib lines on a chart. If you draw enough trend lines and barriers on a chart some are bound to have a price reaction. This is basically the same argument you use to discredit fib lines. Yet you chose to conveniently ignore the example. So my question is; why are trend lines and barriers effective according to you? What hard data do you have concerning this? Unless you believe using trend lines and barriers are not effective tools.

2. William mentioned candle formations and trading price. I back tested these formations a few years ago. Guess what, randomly if you took a trade on the major formations, hammer, outside bar etc anywhere they occurred, on paper they don’t work well. The formations are literally all over the charts. What hard data is out there, scientifically tested that these formations work? I am not saying candles are not useful tools, many use them effectively.

At a minimum DT the results need to be greater than 50/50 to show the results are not random. My point is I doubt you can show this with any consistency.

Some sort of filtering needs to be applied to use candles and other tools in order to trade effectively. In your studies have you taken filtering into account and the overall context of the trade? I strongly doubt it based on your posts in this thread. Filtering and context are exceedingly important and not considering this is a huge glaring void in any premise presented. Failure to properly filter trades and understanding context is a major reason for trader failure, yet you ignored this point as well.

Candles, trend lines or any other tool is just one part of the trading plan. Tools are a means of providing raw data that needs to be developed into useful information. What most newer traders do not realize is that it is your knowledge and ability to reason that brings success as a discetionary trader, and that is something I doubt you tested for or are taking into consideration.

It is not about psycho babble or your winning percentage. It is about gross outcomes not individual events. I am a huge proponent of statistics in the sciences and in business. Running a business without statistics is like flying blind and trading is a business. The bottom line on your balance sheet is the only number that matters.

Telling a trader who is already profitable using Fibonacci effectively and consistently that Fibonacci does not work, is like telling someone something cannot be accomplished after they already did it.

 

[barjon]

mmm, I think many like lines of one sort or another, wiggly or straight, because they give a sense of logic to what they are doing. Unfortunately the market is often "illogical" in the way it progresses.

Like a lot of TA, lines give a trader who uses them a "reason to enter" - it's how you manage that trade from then on that sorts out your bottom line.

good trading

jon

 

[DionysusToast]

Very well stated Hilarymannah.

DT, I have a couple of question for you.

1. I used trend lines and barriers as an example of having a lot of lines on a chart in a previous post on this thread. Trend lines and barrier identification is done differently by different traders and can be quite random. This is not any different than drawing a lot of Fib lines on a chart. If you draw enough trend lines and barriers on a chart some are bound to have a price reaction. This is basically the same argument you use to discredit fib lines. Yet you chose to conveniently ignore the example. So my question is; why are trend lines and barriers effective according to you? What hard data do you have concerning this? Unless you believe using trend lines and barriers are not effective tools.


2. William mentioned candle formations and trading price. I back tested these formations a few years ago. Guess what, randomly if you took a trade on the major formations, hammer, outside bar etc anywhere they occurred, on paper they don’t work well. The formations are literally all over the charts. What hard data is out there, scientifically tested that these formations work? I am not saying candles are not useful tools, many use them effectively.

At a minimum DT the results need to be greater than 50/50 to show the results are not random. My point is I doubt you can show this with any consistency.

Some sort of filtering needs to be applied to use candles and other tools in order to trade effectively. In your studies have you taken filtering into account and the overall context of the trade? I strongly doubt it based on your posts in this thread. Filtering and context are exceedingly important and not considering this is a huge glaring void in any premise presented. Failure to properly filter trades and understanding context is a major reason for trader failure, yet you ignored this point as well.

Candles, trend lines or any other tool is just one part of the trading plan. Tools are a means of providing raw data that needs to be developed into useful information. What most newer traders do not realize is that it is your knowledge and ability to reason that brings success as a discetionary trader, and that is something I doubt you tested for or are taking into consideration.

It is not about psycho babble or your winning percentage. It is about gross outcomes not individual events. I am a huge proponent of statistics in the sciences and in business. Running a business without statistics is like flying blind and trading is a business. The bottom line on your balance sheet is the only number that matters.

Telling a trader who is already profitable using Fibonacci effectively and consistently that Fibonacci does not work, is like telling someone something cannot be accomplished after they already did it.

In my humblest opinion, a lot of this depends on the timeframe you are using. My opinion is that there are basically 2 timeframes you can trade:
1) The immediate
2) Everything else.

by "The immediate" I mean trading based on buying/selling pressure using some form of order book & the tape. In this domain, there is much 'jiggery-pokery' occuring in Futures & Stock markets. Here you can clearly see that around specific levels, people come in and 'play' other traders. This is not always possible, you can't 'play' a runaway market and you can't 'play' a market for days. People do control the market for a while - let's say 10-15 minutes for example and this can provoke a larger reaction with others jumping on board and exaggerating the move. In this environment where people are intentionally pushing markets around in order to provoke a reaction, there are certain places that they will push things around it is clear that prior highs/lows are such places for major 'jiggery pokery' - although you will need to study yourself to figure out just how these area are played. Fib levels - specifically 60-ish and 38-ish are also levels that are played as people that can build large positions know that smaller players will be looking to enter around these points and these people entering the market will give those with larger positions someone to transact agains when they exit. Still in "The Immediate" - you have channels/trendlines which do get observed for a few swings mostly because people are getting in and out at the points they just drew on the charts. The sole reason these things work in "The Immediate" is that the naive are being played by the knowledgeable AND there's a bunch of people in the middle jumping in and out of moves based on their observations of behaviours in that specific market.

Now - once you have observed the above behaviour in stocks and futures, the idea that the markets comply to some mathematical model in this timeframe is ridiculous. It's complying to a bunch of people with deep pockets screwing around with everyone else.

In the longer term, the same dynamics don't apply. Of course people use channels and trendlines to define entries and exits as they do with Fibs. In this mode though - you can't see the games being played - you are not in The Immediate and therefore buying/selling pressure tools used there are not easy to apply here. Of course, you have the self-fulfilling of people jumping in and out at mystical levels. The problem with ANY TA that works over any period longer than The Immediate is that fundamental events outrank the technical ones. So - even if you just brought BP because of a brilliant TA setup that others jumped on, you'd have been screwed when they blew their top.

Whilst you can employ TA techniques in the long term, if you do not keep a handle on the fundamental events that are predictable (i.e. knowing your market), then you are going to get your a$$ handed to you on a plate MANY times and you are going to blame probability when that happens, when in reality it was your ignorance that stopped you out.

Under NO circumstances do specific levels work because some Italian Mathematician found some 'mystical' numbers in the year 1202.

If someone came up with that concept in 2010, they would be laughed at. The ONLY reason people believe in Fibonacci is because it was there when they started to learn about trading, so they decided to accept it as they were new to the game and "higher authorities" had preached this nonsense to them.

Now - about "stuff that works" - the type of evidence we hear here about "stuff that works" is known as anecdotal evidence. It is an association of cause and effect. For instance, I could take an aspirin in a large glass of water and thank God the aspirin cured my headache. On the other hand, my headeache may have been caused by dehydration and it was actually the water that cured me.

So - the fact that you use something dreamed up by some guy on Grappa in the Middle Ages AND you also make money does not mean the 2 are correlated. It is a casual relationship and that is all.

It is understandable that people do not want to accept these things because accepting such things would mean that they would become responsible for the things that make them profitable.

It's a bit like the soccer player who loses his lucky rabbit foot and then plays poorly afterwards - there is no physical reason for this but things like this happen all the time.

Fibonacci Rabbit Feet - I like the sound of that.

IMO - this is all you actually need on a chart for short term trading.... You could do worse than compressing your candlestick chart to the point you can no longer see the candles but CAN see a lot of price action...

 

[DionysusToast]

At the risk of becoming overbearing:

Consider a move like this :

What's the chance of a retracement hitting one of those levels ?

In this case:
Low 1081.25, High 1095.50
Range of Move - 14.25 points
Number of ticks in range = 14.25 x 4 = 57
Number of Fib levels in the range = 5
Accepted tolerance - 1 tick either side

Now we have 5 levels, 1 tick either side which gives us 5 x 3 levels for a 'hit'

57 ticks divided by 15 = 3.8.

So - we have a 1 in 4 chance of any swing being at one of these levels.

On the way up, there were 15-19 swings, depending on how you count them.

So - on the way down OF COURSE some swings will 'hit' fibs just by random chance.

Now - change what you look for in a Fib and you may increase or decrease the probability of hitting one, depending on what you look for.

Looking at it visually, without the benefit of the math, a hit does look like something remarkable, which it often isn't.

As for those question marks - I'm not sure what they are all about at all...

 

["D"]

High DT,

I have a house full and have not had any time to really review your posts until now.

Your posts are very well written explaining your viewpoint from experience which I very much respect. You took a lot of time in preparing your replies.

I understand where you are coming from and your explanations. I use Fibs a bit differently from a different perspective. It would be difficult to explain verbally in a post. Nothing I do is original or earth shattering. If you are interested in how I use fibs email or private message me the same chart as in post number 32 with a light background instead of black and I will print it out and put a few lines on it. With a dark background the lines will not be visible. If you could delete everything but the candles the chart will be cleaner and easier to see. I would like to use the same chart you posted which would be best for consistency and we can refer to the chart in post 32 as a reference if needed. Of course the lines I will put on it will be in hindsight, but the chart is random of your choice and we are looking at the concept, not to actually take a trade. This will most likely be easier to do via email, that is of course if you are interested in doing so.

 

[DionysusToast]

D

I'll do that - I do like discussing these things and I do appreciate discussing with people that have alternate views but don't turn discussions into pi$$ing contests.

Cheers

DT

 

[montmorencyt2w]

I'm inclined to agree with DT's point about confirmation bias. It's a bit like MAs. You will see various analysts quoting different MAs, e.g. "Well it's broken out of the 14 day SMA, so the trend has changed", or it's the 50, or it's the 55....or it's a death cross or a golden cross......choose your number and you can prove more or less what you want to, or rather, justify something after the event.


On the other hand, if you have millions and millions of algo trades out there with these levels built in, well, it's hard to think there would not be some sort of self-fullfilling effect going on.

Newbies should maybe observe them, have fun with them, but perhaps don't bet the farm on them, at least not until you have a few farms to spare.