Newbie Fib question..

[dominationFX]

Hi. I am interested in PA trading. Is fibonacci a myth, or is it real? Some dismiss it as rubbish. Worth studying for newbie PA traders, or am I wasting my time? Best website on fib for FX please?

 

[barjon]

decide for yourself - just browse a few threads on here http://www.trade2win.com/boards/fibonacci/

 

[dominationFX]

Thanks barjon. However, fib either is mathematical fact, or mystical twaddle. It cant be both. Anybody please?

 

["D"]

Fibonacci is neither fact nor twaddle. Trading is not about absolutes, but probabilities.

I presume you are trying to determine if Fibonacci is effective or not. The answer is both yes and no. Many traders use Fibonacci effectively, personally I would not trade without them. Others have not been able to effectively integrate them into their trading plan. So the answer is; it depends on how you use them.

Many traders pay attention to Fibonacci levels and price has a tendency to react around them. Even if you do not use them, you need to be aware of how Fibo’s are used by other traders for this reason.

There are a lot of websites out there. I don’t know of a really good one to refer you to.

 

[RBurgess]

Use fibs as additional confluence only. Concentrate on price.

 

[newtrader22]

fibonacci is a leading indicator,but the important thing is how you want to use it. Projections or retracements of price? that's up to you.

 

[DionysusToast]

Fibonacci numbers are total nonsense. The whole concept has about as much basis in science as Astrology.

Now - there are of course, a lot of people that look at these numbers.

You can try to be clever now and say "So, they do work - because it's self fulfilling" and you'd be wrong. They don't work because there is no consistency in what happens at these levels. The levels are close together and people apply confirmation bias to any move even slightly close to one of these levels.

Fib areas in my opinion are nothing more than an opportunity for professional traders to convince sucker traders to enter the market and then pull their pants down and smack their bottoms.

 

[SH-101]

Fibonacci numbers are absolutely not total nonsense. You only have to look at their wider implications, beyond the markets, to see that.

In terms of applying them to the markets, for me the problem is that most people don't use them effectively. Fib levels are not a case of absolutes. Drawing fib grids on every high/low in a trend and expecting the market to bounce off each level to the pip is as bad as trading every cross of a 1min MACD and expecting to make a profit.

Use a little more intelligence with fib trading and you'll find they can work very well as part of your trading approach. Pick out the key moves to draw fib levels on rather than blindly putting them on every single move in a trend. Look for "cluster" areas. Look for technical/price action signals around key fib levels rather than trading the levels themselves. etc.

Fibs are not the holy grail, they certainly don't work all the time, but I've seen them work countless times in the years I've been trading professionally. Although I don't trade using fibs alone, very rarely do I take a trade that doesn't involve them.

 

[DionysusToast]

Fibonacci numbers are absolutely not total nonsense. You only have to look at their wider implications, beyond the markets, to see that.

In terms of applying them to the markets, for me the problem is that most people don't use them effectively. Fib levels are not a case of absolutes. Drawing fib grids on every high/low in a trend and expecting the market to bounce off each level to the pip is as bad as trading every cross of a 1min MACD and expecting to make a profit.

Use a little more intelligence with fib trading and you'll find they can work very well as part of your trading approach. Pick out the key moves to draw fib levels on rather than blindly putting them on every single move in a trend. Look for "cluster" areas. Look for technical/price action signals around key fib levels rather than trading the levels themselves. etc.

Fibs are not the holy grail, they certainly don't work all the time, but I've seen them work countless times in the years I've been trading professionally. Although I don't trade using fibs alone, very rarely do I take a trade that doesn't involve them.

This is pretty much my point.

"around key fib levels" is the same as saying "anywhere on a chart". You are never alone with Fibonacci - there's always one nearby.

In terms of trading, people give so much tolerance when looking "around" these levels that they a not really being observed anyway.

Remember that Fibonacci numbers did not originate in the domain of trading. They just got applied there because they are 'mystical' - one would have to presume that Fibonnaci was first applied to the markets by SOMEONE THAT COULDN'T TRADE, otherwise - why the seeking ?

The concept of Fibonacci is that they are magical numbers that can be seen in nature and somehow dictate the flow of many things (one being price levels). It's hocus pocus is what it is. It's astrology, it's phrenology, it's palmistry, it's NONSENSE. If Fibonacci numbers were so magical, you wouldn't need to give them such a wide berth when retrospectively trying to say they worked.

The fact is - retracements occur and sometimes thet go over half way before continuing and sometimes they don't - either way - you'll be close to a fib number and often (by the laws of probability) you will hit one dead on. If you set 5 levels on any move and then apply a 2% tolerance around the levels - you will hit one of them (within tolerance) 10% of the time. This is bugger all to do with any levels pre-defined in nature but very much to do with the laws of probability.

Of course pullbacks occur around Fib levels a lot of the time - but this is because - wait for it - "Pullbacks occur". The fact is that millions of people look at this and see something that they (by the laws of probability) would see even if the percentages were picked at random and not according to Fib. The issue is that people don't understand probability and confirmation bias.

I don't disagree with watching for price action around Fib levels. I have already said that these levels are used to entice people into the markets. It is just that the original concept of Fibonacci as a set of mystical numbers that guide the fate of (amongst other things) the markets is - total bo11ocks.

If you want something to look at - look at whole numbers, not Fib numbers.

 

[SH-101]

I was about to write a very long reply there DT until I realised we're singing from different hymn sheets in terms of the application of fibs which means this debate could go round in circles

Your main point seems to be the tolerances involved in determining whether or not price has "respected" a key fib level, whereas that's not really an issue for me in the way that I use fibs. I don't deny the fact that fibs aren't pip-accurate - it would be great if they were, but they're not. For me however, the key is where the close of a particular bar comes in terms of its relationship to the fib level/cluster.

In this GBP/JPY example the market traded around 100 points past the 38.2 fib - you'd probably see that as proof that the fib level is irrelevant and that the reaction is a co-incidence - whereas I'm interested in where the bar that came into contact with the fib level closes. Had it closed above - the market has ignored the fib level - but it closed below which - by my interpretation - means that the level has held. The distance the market went past the level is not entirely relevant. I wait for the market to react to the fib level before I try to trade it, and not the other way round.

So I guess to expand upon my earlier point, it comes down to how you use fibs to determine if you think they work. I can totally understand your point about the tolerances involved, and I can see how this would lead you to a belief that the levels are actually not relevant - I'd concede that the "textbook" way of using fibs is probably ineffective as often as it is effective - but my own particular usage of them is something that's come about through more than 5 years of study and application - It works consistently and I'd be happy to show you countless examples.

 

[SH-101]

The application of fib numbers to the markets is not restricted to the standard retracements/extensions.

If you like indicators, try using fib numbers in your indicator settings to see if they improve results. Notice how the rally in the Dow halted not just on the 61.8% retrace of the 2007-08 slide, but also on the very first occasion that the market traded outside the 8-bar bollinger bands during the 2009-10 rally - 8 being a fib number...

Throw 21, 34, and 55 ema's on your chart and see if you notice anything... etc

 

[DionysusToast]

Fibonacci numbers ARE present in nature, this does not mean that are at all relevant in the markets.

Can you explain SH-101 WHY fib numbers would work at all ?
Have you ever tested the same techniques you use with random levels as opposed to the one's some dead Italian dude thought of ?

I would wager the answer to both is no. You neither have an explanation for why Fib numbers are in any way relevant to trading, nor have you done any testing on random levels to check that your methods need levels at any specific point or they would work of price behaviour at any level. In short - you could be using a crutch when you can in fact walk fine without it.

For every chart you throw up with a fib 'working' there are charts I could throw up that show it doing nothing at all.

Your charts show that you are applying more tolerance to Fibs than most - which leads you to see the behaviour a lot because it covers a decent range of price behaviour.

 

[DionysusToast]

The application of fib numbers to the markets is not restricted to the standard retracements/extensions.

If you like indicators, try using fib numbers in your indicator settings to see if they improve results.

Indicators are a crutch and a poor one at that.

 

[SH-101]

Can you explain SH-101 WHY fib numbers would work at all ?

No - as I said in the previous post I can't. But I don't need to. I have more than five years of empirical data with regards to the effect of fib levels on my trading to go on - that's enough for me. It might not be for you, but that's your issue.

Have you ever tested the same techniques you use with random levels as opposed to the one's some dead Italian dude thought of ?

Not the exact same techniques as I currently use, no. I have however done a number studies with specific price action triggers combined with different types of support/resistance levels (fibs, pivots, trendlines, previous highs&lows etc) along with a "control group" where the same price action trigger was recorded wherever it happened to appear regardless of S/R, which could be considered the same as combining it with random levels. In all cases, the trigger was more effective when combined with some type of S/R, although only marginally in the case of pivot points, which I tend not to use these days anyway. FWIW, I found that 38.2, 50 & 61.8 fibs and specific fib-numbered MA's were the most effective...

Again, I can't explain exactly why the s/r levels were more effective, but who cares? I don't need an explanation when I have the data. I couldn't tell you how an internal combustion engine works, but it doesn't stop me driving my car.

For every chart you throw up with a fib 'working' there are charts I could throw up that show it doing nothing at all.

Of course you could. That's why I said the textbook ways of using fibs probably aren't that good. However after extensive mult-year study I found a way to interpret the interaction between price and fibs which provides me with positive results. I get the feeling that you're someone who prides themselves on unconventional or "outside the box" thinking; I would have thought you might appreciate that.

Your charts show that you are applying more tolerance to Fibs than most - which leads you to see the behaviour a lot because it covers a decent range of price behaviour.

No - what I see is a specific interpretation of fibs, resulting in reasonably predictable behaviour, borne out over thousands of trades, on various timeframes, over a number of years. I know that my trading results are generally poorer if significant fib levels are not involved in my decisions.

 

[SH-101]

Indicators are a crutch and a poor one at that.

And yet, somehow, they pay my bills

 

[DionysusToast]

SH-101 - here's the problem. You say you are profitable and I will take you at your word on that.

You are using something & you have no idea WHY it works. You have clearly not tested to see if your techniques would work with any old line or even a "Well - that pullback looks done now".

You say indicators pay your bills, this is not true. If you are profitable - it is YOU that is making the profit, NOT the indicators.

The whole concept of Fibonacci numbers being magical in some way is twaddle - hence your inability to explain it. In fact, hence EVERYBOY'S inability to explain it.

All of this is fine up to the point where we start making assigning cause to the effect. The fact you are profitable and the fact you use Fibonacci might be totally unrelated.

If we think about it though...

- why SHOULD Fibs work - Don't know
- who introduced Fibs to trading - Don't know (well I don't)
- why did they introduce Fibs to trading - Don't know

These are very pertinent facts when we advise someone to use Fibonacci as a trading tool. By giving such advice, without understanding how much Fib is contributing is potentially putting someone on a path to wasted time/money.

Now - I will repeat again, I will use Fibs - on futures when I am hoping to see lots of tiny trades pass through at a level, only to see some big boys come in and wipe the little guys out. This is on short term trading.

It looks very much to me like Fib levels are sucker levels.

 

[William Waller]

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

 

[SH-101]

SH-101 - here's the problem. You say you are profitable and I will take you at your word on that.

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

You are using something & you have no idea WHY it works. You have clearly not tested to see if your techniques would work with any old line or even a "Well - that pullback looks done now".

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.

You say indicators pay your bills, this is not true. If you are profitable - it is YOU that is making the profit, NOT the indicators.

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?

The whole concept of Fibonacci numbers being magical in some way is twaddle - hence your inability to explain it. In fact, hence EVERYBOY'S inability to explain it.

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".

- why SHOULD Fibs work - Don't know
- who introduced Fibs to trading - Don't know (well I don't)
- why did they introduce Fibs to trading - Don't know

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...

It looks very much to me like Fib levels are sucker levels.

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...

 

[Highfreq]

I totally second SH-101 on this one. Fib. levels are voodoo! But I needed many years of trading before realizing it. My first 10 years were catastrophic. I was loosing bad as most traders do (95% ?). The last 5 years though became profitable. I think the reason is experience but mostly the level of non "believeness" I reached after playing with most methods available in technical analysis; they are 95% rubbish (I like 95). Now I have more realistic expectations. Fibs are worthless for effective trading but in my case helped me getting profitable.

Great synth btw.

 

["D"]

Hi DT and SH,

DT, concerning your comments on Fibs and all the Fib lines all over the charts, think about this for a moment. If you put a channel or trend line on every small through large move and then do the same with minor through major barriers, chances are you would have so many lines on your chart that you are bound to get a reaction off of some of them, and what about the other lines that provided no value? I did this once for fun and I had so many lines the bars were difficult to read. Fibonacci is no different. Now this does not mean trend lines, barriers and Fibonacci are useless. It means we need to find a way to filter the signals to make such tools productive for us. This is likely to be different for different traders, different plans and different conditions.

DT, I copied and pasted a link to a previous post below on how I use Fibs and filter them that may provide a little insight for you. It is post number 7 in the thread if the link does not open directly. You may or may not come to a different conclusion concerning the use of Fibs. Hopefully you may find something in the post to contribute to your trading success.

SH I would be interested on how you use Fibs and evaluate them.

http://www.trade2win.com/boards/for...66-fib-retracement-strategies.html#post989250