Trading with Fibonacci retracement

[XTX]

Hi guys. Can you share here please how do you use fibonacci retracement levels in your trading and do you find it as a valuable tool or not?

I have read this article, which claims that Fibonacci levels are human made, but I don't understand the technics used in it to be honest

http://forexop.com/strategy/fibonacci-fact-or-fiction/

Any advice or opinion is much appreciated!

 

[vanillaman]

Hi guys. Can you share here please how do you use fibonacci retracement levels in your trading and do you find it as a valuable tool or not?

I have read this article, which claims that Fibonacci levels are human made, but I don't understand the technics used in it to be honest

http://forexop.com/strategy/fibonacci-fact-or-fiction/

Any advice or opinion is much appreciated!

To be honest, think of Fib levels as buyer and seller strength. So 50% retracement suggests that the bears pushed back 50% of long positions relative to the most recent impulse, it gives you a sense of who is in control and what price level is attractive to new business or not. So that's probably the real use.

 

[tomorton]

I declare myself a sceptic on Fibonacci ratios. But that's maybe only because they tempt traders to misuse them.

You can see more detail at investopedia.com (excellent factual resource BTW).

Its said a Fib retracement level will often turn out to be significant support or resistance to a recovering price. But so could round numbers, and so could round numbers counted from the extreme high/low, or from a swing high/low, and so could old support/resistance (if that is indeed what it was at that time), and so are trend slopes and so are MAs. and os are previous closes and Pivot Points and anything else you can think of.

The danger is in the end you turn out a chart with so many lines on it that might become support or resistance that you can't see the price action. Its more important to see what is than what might be.

 

[dbphoenix]

To be honest, think of Fib levels as buyer and seller strength. So 50% retracement suggests that the bears pushed back 50% of long positions relative to the most recent impulse, it gives you a sense of who is in control and what price level is attractive to new business or not. So that's probably the real use.

50% is not a Fib level, though it is true that 50% often acts as the level at which buyers who bought at the swing low and shortists who sold at the swing high say "ouch". OTOH, traders buy and sell all the way from the swing high down and the swing low up. Otherwise price wouldn't move.

It is demand that moves price up and supply that moves price down, not bounces off and penetrations of some indicator or other. Understand that and you'll have it. Rely instead on the tricks that Tom listed and you'll struggle.

 

[vanillaman]

50% is not a Fib level, though it is true that 50% often acts as the level at which buyers who bought at the swing low and shortists who sold at the swing high say "ouch". OTOH, traders buy and sell all the way from the swing high down and the swing low up. Otherwise price wouldn't move.

It is demand that moves price up and supply that moves price down, not bounces off and penetrations of some indicator or other. Understand that and you'll have it. Rely instead on the tricks that Tom listed and you'll struggle.

It was an example, I could say 61.8. My point is, it is all irrelevant. The market may or may not find support, so it is totally arbitrary. At best it can be used in the context of exploring balance and imbalance, 50% being the median point.

 

[dbphoenix]

It was an example, I could say 61.8. My point is, it is all irrelevant. The market may or may not find support, so it is totally arbitrary. At best it can be used in the context of exploring balance and imbalance, 50% being the median point.

If by "irrelevant" you're referring to Fib levels, that's true. If however you're referring to support and resistance, not so much. Support is found when sufficient buyers are willing to pay the ask and sellers can raise their prices. Resistance is found when buyers are no longer willing to pay the ask and sellers have to lower their prices. These points and levels often echo what has gone before, hence phenomena such as the "double top". The reasons for these reversals may be unknowable, but the points and levels at which they occur aren't arbitrary.

 

[vanillaman]

If by "irrelevant" you're referring to Fib levels, that's true. If however you're referring to support and resistance, not so much. Support is found when sufficient buyers are willing to pay the ask and sellers can raise their prices. Resistance is found when buyers are no longer willing to pay the ask and sellers have to lower their prices. These points and levels often echo what has gone before, hence phenomena such as the "double top". The reasons for these reversals may be unknowable, but the points and levels at which they occur aren't arbitrary.

I agree with you on supports, I mean't fibs generally and yes by balance I am referring to some kind of support as orders fail to continue to imbalance so there is equilibrium which you call support. So the market follows an imbalance, balance to continuation or reversal. If we are to reverse, the market supports and reverses, if we are to continue the market tests and then breaks and continues imbalanced. So I do get your meaning Fibs in a way can suggest where this balance is statistically likely to occur relative to previous imbalance or balance. Like I said it won't always work because because sudden surprise information can imbalance the market. There is no accounting for this.

 

[dbphoenix]

Fibs in a way can suggest where this balance is statistically likely to occur relative to previous imbalance or balance.

What is the statistical evidence to support this contention?

 

[darktone]

Hi guys. Can you share here please how do you use fibonacci retracement levels in your trading and do you find it as a valuable tool or not?

I have read this article, which claims that Fibonacci levels are human made, but I don't understand the technics used in it to be honest

http://forexop.com/strategy/fibonacci-fact-or-fiction/

Any advice or opinion is much appreciated!

imho, if theres any value value to using fibs its that they encourage the tarder to operate in an direction that's in their favour, ie retracement / extension. Its value seeking.
If youre hoping to get the usual "the market is gona turn there cos o fibs" your gonna struggle, x10 if youre using stops.

 

[Splitlink]

I have studied, and given up on, Fibs years ago. I believe that they are little more than an opportunity for the market to get its money back, if the trader has made a good profit from the rise caused by the Fib line, in the first place. Hope I'm not speaking Double Dutch.

If the trader believes that a retraction has started why not close his open trade and wait? I am a spreadbetter, where the spreads are a point on the more popular indices, which I trade. Other traders get far better spreads than that with a broker. What, then, is the point of losing a lot of points when one can be out of the market and waiting for what happens next?

This thread has made me look at Fibs, again, this weekend. I have not changed my original opinion.

 

[sacbnc]

Fib numbers and pattern do occur in nature so it's a fair assumption to say it is possible the markets do somewhat reflect fib ratios with the market being the consequence of people. I'm sure you could backtest and determine i.e. what percentage of 61.8% pullbacks made a new high - then you could trade it with more confidence if the result was high enough.

Another important concept to think about is that by fib being a popular trading tool it's application can be fulfilled by the mass of people using it. i.e. the market rests at the 61.8% and looks like it could be a really sweet pullback - so everyone buys it and it goes up.

 

[dbphoenix]

Fib numbers and pattern do occur in nature so it's a fair assumption to say it is possible the markets do somewhat reflect fib ratios with the market being the consequence of people. I'm sure you could backtest and determine i.e. what percentage of 61.8% pullbacks made a new high - then you could trade it with more confidence if the result was high enough.

Another important concept to think about is that by fib being a popular trading tool it's application can be fulfilled by the mass of people using it. i.e. the market rests at the 61.8% and looks like it could be a really sweet pullback - so everyone buys it and it goes up.

First, the markets are what they are due to the choices and decisions that people make, neither of which are derived from "nature".

Second, backtests have been done and no statistical significance has been found regarding Fib levels unless so much leeway is allowed that they become meaningless. What would be more useful is testing of those who trade them in real time. If one could find any traders who do so.

Third, Fib levels are popular only among amateur traders. Given that there are a variety of classes of traders trading, some of whom have enough money to move markets and have no interest in Fibs and some of whom are clueless and for all intents and purposes are perpetually chasing balloons, the trader who wants to turn a profit would do well to trade with those who have the money rather than those who are dazzled by bright, shiny objects.

 

[sacbnc]

First, the markets are what they are due to the choices and decisions that people make, neither of which are derived from "nature".

Second, backtests have been done and no statistical significance has been found regarding Fib levels unless so much leeway is allowed that they become meaningless. What would be more useful is testing of those who trade them in real time. If one could find any traders who do so.

Third, Fib levels are popular only among amateur traders. Given that there are a variety of classes of traders trading, some of whom have enough money to move markets and have no interest in Fibs and some of whom are clueless and for all intents and purposes are perpetually chasing balloons, the trader who wants to turn a profit would do well to trade with those who have the money rather than those who are dazzled by bright, shiny objects.

To be clear the intention of my post was to highlight the possibilities of fib, but not how effective it is. I made this clear by stating one would identify it's validity as a tool by back-testing. Lack of positive back-testing however does not mean there is no element of fib numbers and ratios in the market.

You have precisely summarized why fib numbers that do occur in nature (scientifically proven) could occur in the markets. The outcome of a mass of human decisions is a natural phenomena and that is why I believe scientifically there is a possibility that fib numbers do exist in some form as a consequence of this natural phenomena.

To be clear at no point am I saying fib is a powerful or valid trading tool. I am saying I believe there is a possibility of it's application to some degree. The key word here being possibility.

 

[dbphoenix]

To be clear the intention of my post was to highlight the possibilities of fib, but not how effective it is. I made this clear by stating one would identify it's validity as a tool by back-testing. Lack of positive back-testing however does not mean there is no element of fib numbers and ratios in the market.

You have precisely summarized why fib numbers that do occur in nature (scientifically proven) could occur in the markets. The outcome of a mass of human decisions is a natural phenomena and that is why I believe scientifically there is a possibility that fib numbers do exist in some form as a consequence of this natural phenomena.

To be clear at no point am I saying fib is a powerful or valid trading tool. I am saying I believe there is a possibility of it's application to some degree. The key word here being possibility.

However, a mass of human decisions is not a nautilus shell, nor is it a golden section. And while there is a possibility that Fibs do exist in some form to some degree, one could say the same thing about the influence of tides, real or imagined (the influence, not the tides).

Novices would more likely put their time and effort to better use by studying and understanding how markets work than by becoming enmeshed in lala.

 

[sacbnc]

Well I respect your point of view and your point about tides is completely valid.

For me evaluating something within a scientific framework gives a good base. Using this for questions that don't have a proof surely is useful? i.e. is there one true answer to whether the market is efficient? By what measure?

From what I understand such a mindset is also one that would be flagged as positive characteristic in the context of trading. Of course it's application would be key.

 

[dbphoenix]

Well I respect your point of view and your point about tides is completely valid.

For me evaluating something within a scientific framework gives a good base. Using this for questions that don't have a proof surely is useful?

Very much so. However, very rarely is the scientific method applied to indicators. Rather novices rush toward them as if they were magical. Candle patterns, for example.

Someday someone may come up with an indicator that has value, even if they do lag. In the meantime, I'll stick with trading greed and fear.

 

[vanillaman]

What is the statistical evidence to support this contention?

You collect the data yourself, like I said, I am not in defense of it. There was a certain famous trader who visited oracles to get trading decisions. Lol. Anyway, the tool does a simple thing it takes an impulse then measures it. Like anything if that impulse was presumably caused by real money moving the market then any pullback can suggest either a forced liquidation due to new information or the order flow has changed, either way the call is easier to make once the impulse has been corrected to half its initial move. This is just logic, nothing to do with trading, the same principle can be applied to anything. So if you look at fibs in that context this shouldn't really impact your trading. Like in all things you need to have a reason to want to measure and impulse or correction. If not what would the point be?

See! No argument...

 

[sacbnc]

You collect the data yourself, like I said, I am not in defense of it. There was a certain famous trader who visited oracles to get trading decisions. Lol. Anyway, the tool does a simple thing it takes an impulse then measures it. Like anything if that impulse was presumably caused by real money moving the market then any pullback can suggest either a forced liquidation due to new information or the order flow has changed, either way the call is easier to make once the impulse has been corrected to half its initial move. This is just logic, nothing to do with trading, the same principle can be applied to anything. So if you look at fibs in that context this shouldn't really impact your trading. Like in all things you need to have a reason to want to measure and impulse or correction. If not what would the point be?

See! No argument...

I like your take on this

I think the "my way is right and your way is wrong" paradigm can force people into having conversations that aren't as constructive as they could be

 

[tomorton]

The discussion reminds me of the fund manager who - after he'd retired! - revealed he'd made his buy/sell decisions based on how many red/green traffic lights he encountered on the weay to the office. If the greens were in the majority, it was a buy day, if the reds had it, it was a sell day.

How successful was this? Well, he survived long enough to retire.

 

[dbphoenix]

The discussion reminds me of the fund manager who - after he'd retired! - revealed he'd made his buy/sell decisions based on how many red/green traffic lights he encountered on the weay to the office. If the greens were in the majority, it was a buy day, if the reds had it, it was a sell day.

How successful was this? Well, he survived long enough to retire.

There's also the guy back in the 60s who received messages from Mars via a Coke bottle with a scrap of antenna sticking out of it. Enviable success, the key to which was cutting his losses short and letting his profits run.