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Where is the logic behind applying Fibonacci to trading?

  • Post #1
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  • First Post: Feb 4, 2016 7:39am Feb 4, 2016 7:39am
Can someone please explain to me why Fibbonacci levels are used in technical analysis? Where is the logic behind assuming that price will respond to these 'magic' levels? Or do they just form a self fulfilling prophesy due to the vast number of people who watch out for them?
There is no logic, and price don't "respond" to these levels, but people want to feel like they have some tool that somehow help them in their trading, so we have... fibonacci!
Quoting Ponzi Jr
Can someone please explain to me why Fibbonacci levels are used in technical analysis? Where is the logic behind assuming that price will respond to these 'magic' levels? Or do they just form a self fulfilling prophesy due to the vast number of people who watch out for them?
I don't agree with the last poster, when it comes to fibonacci, there are two groups of people, the first group thinks that it is just mumbo jumbo, those are the ones that will tell you fibonacci trading is just a self fulfiling prophesy, and the second group where I belong believes that fibonacci numbers are divine, the logic behind the first group resoning, is that there is no logic, they are close minded and only believe what they can touch and see. the second groups logic is that, fibonacci numbers are in everything in the universe, a leaf, the human body, it doesn't matter what it is, it's there! and the fact that price always reverse at a fibonacci level, I repeat ALL!, that must say something, it is not that all traders use fibonacci, we know they don't. these numbers are divine there is no other way to put it. ofcourse there are people that don't believe in divine things. but you can just check for your self.
Bulls are stupid Animals!especially when Im short!
Quoting roughtrader
{quote} I don't agree with the last poster, when it comes to fibonacci, there are two groups of people, the first group thinks that it is just mumbo jumbo, those are the ones that will tell you fibonacci trading is just a self fulfiling prophesy, and the second group where I belong believes that fibonacci numbers are divine, the logic behind the first group resoning, is that there is no logic, they are close minded and only believe what they can touch and see. the second groups logic is that, fibonacci numbers are in everything in the universe,...
As someone studying mathematics at university, there is little I understand beyond what is logical. For that reason, I feel I should keep Fibbonacci and other 'magic' elements out of my trading. Thanks for your input though.
  • Post #5
  • Quote
  • Edited 7:09pm Feb 4, 2016 6:47pm | Edited 7:09pm
I think the Fibonacci levels are an excellent tool, if used correctly. I use it for precise entries, but on pairs that I have already analyzed and are ready to trade anyway. For example, new traders, sometimes find out about this tool, and then proceed to place it on the charts, wherever and randomly. Once learned to use in conjunction with the technical analysis that fall in line with the fundamentals at the time, then place the Fib tool, and use for entry.
For example: If I missed an excellent set up for a double top trade, I will use the 61.8% or the 78.6% retracement (if happens) to enter. I still get into an axcellent trade, but at a little worse price. I find the SL though is usually smaller entering that way than right at the top of the double top.
NO - You most certainly cannot win every trade this way (of course) but when you get a runner the profits far outweigh what the losses would be.
So, to me, it's not a "magic" tool, but it certainly does help to pinpoint entries a lot more accuratly... In the correct scenario.
  • Post #6
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  • Edited 7:51pm Feb 4, 2016 7:21pm | Edited 7:51pm
Who cares, as long as it works and it does. I don't believe in devine intervention but I know that institutional traders use them and that's good enough for me. I do believe they are self fulfilling prophecy because so many traders buy/sell at these levels and/or put stop loss behind them so fibonacci levels become support and resistence zones. Exactly the same as 200, 100 and 50 simple moving averages. There is no magic behind it, just buy and sell orders concentrated around those levels. If buyers win you see a bounce if sellers win you see price action going through fibonacci level as stop loss of long orders (sell orders) behind it get activated and price usually falls to the next fibonacci level, moving average or previous PA support/resistence zone. Fibonacci levels only give you potential demand/supply zones and potential profit targets (again demand/supply zones), nothing more, but with proper risk management and aligned fundamentals that's all you'll ever need to buy cheap, sell expensive more often then not.
Quoting tunera
There is no logic, and price don't "respond" to these levels, but people want to feel like they have some tool that somehow help them in their trading, so we have... fibonacci!
I use price action, I donīt use any indicator, but I use Fibonacci just to help me with possible exit and take profit. Often times Fibonacci give me a very good result so I use it ONLY to exit, and in combination with supports and resistences, miminum and maximums and psychological prices.
It works for me.
Since I am using fib exclusively for all my trades so I would like to share what my understandings on fib in relation to my trading. Fib is but only just a trading tool I use to measure and quantify the price movements same as I am using a ruler or a measuring tape to measure the lbh of anything I wish to built and/or to know the the distant I need to cover to reach my destinations etc. So to re phase you question would be where is the logic that price movements would respond to those scales and measurements on the ruler or measuring tape then the answer is none zero. Its just a tool and nothing to do with logic. However the logical part or usefulness would only comes in with the knowledge on how to apply its right usage or function on the things you seek to build or wish to know its measurement. I personally apply the same principles with how I trade forex.

I think its more important to know how when and where to use it than to grasp the reasons to know the logic behind it.

Just sharing...

GS
Quoting genghistar
Since I am using fib exclusively for all my trades so I would like to share what my understandings on fib in relation to my trading. Fib is but only just a trading tool I use to measure and quantify the price movements same as I am using a ruler or a measuring tape to measure the lbh of anything I wish to built and/or to know the the distant I need to cover to reach my destinations etc. So to re phase you question would be where is the logic that price movements would respond to those scales and measurements on the ruler or measuring tape then the...
There has to be a logical reason behind this 'how, when and where to use it' no?
we're just trying to make sense in this randomness.in the end people believes what they want to believe
Don't mind me.. i'm crazy
Quoting skyway
{quote} There has to be a logical reason behind this 'how, when and where to use it' no?
I wont call it logical reason but I would rather say the right application on how to use it correctly in the specific context in forex in the areas of trends, pullbacks retracements projections etc. Price moves without hardly any logic mostly...And by the way pulling it from high to low of prices and vice versa is the wrong way to me.

GS
Quoting tunera
There is no logic, and price don't "respond" to these levels, but people want to feel like they have some tool that somehow help them in their trading, so we have... fibonacci!
totally agree with this point.

the mind need reference to work with abstract concept.
Quoting Ponzi Jr
Can someone please explain to me why Fibbonacci levels are used in technical analysis? Where is the logic behind assuming that price will respond to these 'magic' levels? Or do they just form a self fulfilling prophesy due to the vast number of people who watch out for them?
as a mathematician, i can say that ratios in nature do exist, even car designers and architects use Fibonacci to sculpt their creation to make it more appealing to one's eye. same way its SUPPOSED to "predict" the ideal way prices and charts fluctuate. does it really work? in theory it does, but it fails because the market is not one of nature but man-made.
Fibonacci levels are places on the price map where traders feel most comfortable. These are price regions where the most traders are "happy" with the price.

Most traders will place Fibo levels incorrectly, however. The tendency is to place the Fibs at extremes. It is important to find those "comfort levels" and draw from one comfort level to another on a large enough time scale to find other comfort levels hidden inside. When you find those levels, you will be amazed at how easily you can predict the place where most traders will be most comfortable next.

In my example (and no, the Fibos were not drawn upside down...), you can see the small cluster on the left of the screen in a monthly chart of AUDUSD, as well as the strong cluster at the top of the movement. Now notice how there are many places before and after the top where price tends to collect and be "happy."

A population of rabbits are happiest when there are just enough rabbits to make everyone happy. It is a natural law of the Universe that I cannot begin to wrap my whole head around, much less begin to explain it. It just is.
Accept it.

Also, notice on the side, you can see the actual percentage levels I use to see the comfort levels. If you place a %$ and space before the level in Fibo Properties (MT4/5, of course...), then the percentage levels will be written for you.

The longer term Fibos of Weekly and Monthly are best. That way, you know when you are coming into a real area...a zone...where traders feel most comfortable.

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Quoting Bicarus
{quote} as a mathematician, i can say that ratios in nature do exist, even car designers and architects use Fibonacci to sculpt their creation to make it more appealing to one's eye. same way its SUPPOSED to "predict" the ideal way prices and charts fluctuate. does it really work? in theory it does, but it fails because the market is not one of nature but man-made.
Men are natural beings, as well.

Quoting Orly
{quote} Men are natural beings, as well.
true, that is why the length of your body joints and organs are of proportion. http://www.goldennumber.net/human-body/
  • Post #17
  • Quote
  • Edited 10:55pm Feb 4, 2016 10:01pm | Edited 10:55pm
It is just a tool to measure potencial retracements and extentions after established trend. After a breakout from range/chart pattern institutional investors don't chase price IF they didn't catch the brake. They wait for a pullback/throwback or correction wave to get in the trade at better price. That's when fibonacci retracement levels come into play. IF a lot of investors/speculators put buy orders at fib levels they will overweight sellers and price will move up again and vica versa for downtrend. It's only lots of traders looking at the same retracement levels and taking orders there. That's why confluence of fib levels from different time frames, trendlines, MAs is so important. More traders looking the same level to take long/short trade, higher the probability of price reversal. Price action is just endless battle between bulls and bears and fibonacci levels help you determine where next potential battlefield will be.

After establishing where support/resistence zones are, everything comes down to winrate and risk/reward ratio. If the number comes out positive, we have the edge. As a retail traders, we are only dealing with assumptions and probabilities, never certainty. We don't have live sentiment feed of Deutsche bank's liquidity pool to take very educated guesses as their traders do for example, so all we can do is to read signs through price action and get sentiment proxies from fxcm, oanda, dukascopy. It isn't very much, but it's better then nothing. Very similar to playing poker on high level.
Quoting Ponzi Jr
Can someone please explain to me why Fibbonacci levels are used in technical analysis? Where is the logic behind assuming that price will respond to these 'magic' levels? Or do they just form a self fulfilling prophesy due to the vast number of people who watch out for them?
I would never establish a position from a technical view point as I'm more a fundamentalist and decide from other factors however I never dismiss what the technicians are thinking.
@nobody in particular

The question "(why) do fibo levels work/not work?" has been asked, and answered, many times before (e.g. here). Or if you disagree, there are plenty of alternative answers in that thread to choose from: take your pick.
Fibs work perfectly. So perfectly you can even change the percentages used in the fib tool to whatever you like, and it'll still show price "respecting" the quasi-fib boundaries you've plucked out of your butt.

But the secret sauce to fibs is matching it with astrology and tarot. Only trade when the morning paper says your star sign is going to have a good day, but also only when your local crackpot with a deck of cards reads your fortune and says good things.

Then sniff some more glue because you are all crazy af.
Congratulations ScalaFX for coming out of the closet!
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