There does seem to be some merit in using Fib Levels (and other levels derived from Fib ratios) when trading FX. In my experience, the same cannot be said when trading Equities however.
So why is this? If these ratios are so important due to their underlying mathematical number sequence appearing throughout nature, then why are they more suited to FX?
There has been a number of discussions as to why this is the case. One train of thought that I share is that FX is traded in a more "technical" manner, so these levels are more relied & acted upon by many traders.
Consequently, As already stated above, to some degree they therefore become self-fullfilling.
My personal issue with them is to do with how many there are of them. Plot all the Retracement levels (and in some instances Fib extensions as well ) on any one particular chart and there is bound to be a reasonable/high likelihood that price is going to bounce / retrace at some of them at some point !!!!
Chorlton
Hi Chorlton,
Perhaps the answer to your question (equities vs forex) might lie in the fact that much higher volumes are involved in the currency markets than in the equities markets. Not sure though. But I do believe the higher the TF the more likely the ratios are to "hold".
Are Fibonacci levels just a phenomenon of a self-fulfilling prophesy?
N0 ... categorically NO! ... but just my view.
Why do I so strongly believe this?
Consider this:
1) How many retail forex or even equities traders actually use Fibs:
a) In every trade
b) In some of their trades?
2) Would these trades be enough to influence the turning points of markets?
a) Definitely NOT - Market prices are "given" to traders through their retail brokers, from the Interbank feeds.
b)There is NO feedback loop that I know of where a handful of traders in any particular region can get the Interbank to "move" at any specific Fibs level.
3) Do Banks and Institutions and other larger users of the Foreign Exchange market use Fibs?
a) If so, do they have a larger part to play in establishing the Fibs levels that then feed on down to Retail Forex Brokers, and through to traders?
b) If not, the question remains unanswered: How do Fibs become involved in the apparent turning points of financial markets (amongst other things)?
It is my opinion (everyone has one) that the Fibonacci phenomenon is an accidental discovery of in inherent relationship that has probably always existed. Now I have NOT been able to go back 10 years or more to put the figures over previous markets - pre-popularity of Fibs; but I suspect that the relationship could just as easily be demonstarted in Corn Futures in 1890, and Soya Meal in 1980!
One of the notable things about Fibs is that they do NOT have a concise point at which one could emphatically say that the markets will do one thing or another. But nor could anyone emphatically say that markets MUST turn at previous points of Support and Resistance. They just tend to do that for the usual reasons we believe it.
So it is with Fibs - they just do tend to have some significance, and the higher the TF the more likely it is that the levels will hold some importance. I have personally seen this many times.
Now the same could be said for Pivot Points - they do not always hold ... but they do have some significance - particularly when there is confluence with other indicators like Fibs. Maybe the big boys sit there and watch the Fibs and Pivot levels, and decide that this is where THEY will sell short, or go long? Hardly likely - many of them don't even use charts ... much less indicators..
It is more likely that the bigger traders using the Interbank trading houses would be looking at the "round figures" of numbers ending with "00" or "50" rather than any specific ratios. I can't believe that big traders would actually be using an Indicator to move their orders! It is more likely that the movement of their orders create these levels which we are detecting in the Retail Forex markets, and from which prices we create our indicators!
I guess there must be some chuckles at times in high places about such things!
Bit long winded - sorry.
But I enclose a link to a bloke down-under who specialises in Fibonacci numbers. You might like to have a look at his free stuff, and receive his free newsletter - I do, though I get so much stuff I just don't read it all. I have no connection with this bloke in any way - the link was sent to me by a fellow believer!
The site
Trading with the Gods - Stock market education has a regular free video and a free eBook about Fibs. He also has other services for which you may have to pay - I don't go that far. But I think it is worth a look - might answer a few questions, and perhaps the gent may answer questions directly ... dunno!
With best wishes
Ivan
PS - The attached charts are: AUDUSD with Fibs attaced correctly and the Commonwealth Bank of Australia, again with Fibs correctly shown.
Notice that the Fibs were placed weeks before this on those charts, and the Fibs have had a continuing and accurate predictive widow to display to any who chose to look. Corectly used, Fibs could be a very useful tool in traders' kits.
