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Why 61.8%?

  • #21
  • Apr 29, 2010 9:41pm Apr 29, 2010 9:41pm
Quoting waves
I have no desire to win this arguement.......

You mean you have no way to win this argument. I sense you have plenty of desire. <- Really didn't mean to sound like Yoda.
You were the one who gloated about spending my money first, remember?

Just for the record. Do you use 50% as a retracement level?
  • #22
  • Apr 29, 2010 9:49pm Apr 29, 2010 9:49pm
nope..it doesn't exist in fibonacci. it is however a trading level.......but like I said..I have zero desire to argue.....keep trading
  • #23
  • Apr 29, 2010 9:50pm Apr 29, 2010 9:50pm
Why did you start an argument then?

You cast the first stone, why not back it up with some rocks?
Or nautilus shells maybe? I've heard they're fibalicious.
  • #24
  • Apr 29, 2010 10:00pm Apr 29, 2010 10:00pm
Quoting fxpipper
I've recently really taken an interest in the Fibonacci retracement tool...but something's been bugging me, and that is the 61.8% ratio. What is it about this number that makes it the most significant of all the ratios? I've heard it be called the "golden ratio", but don't understand why.

Is there a reason? Or is it just something that has been firmly ingrained into the minds of traders, that the reasons don't matter anymore.

I've been trading the EUR/USD since the start of the down trend in December and watched it pretty much blow through...
Like any technical analysis tool, there are those that can use it to profit and those that can't.
Don't wish it were easier, wish you were better. ~ Jim Rohn
  • #25
  • Apr 29, 2010 10:03pm Apr 29, 2010 10:03pm
Quoting LasVahGoose
Like any technical analysis tool, there are those that can use it to profit and those that can't.
We really should be trying to find out why.
I mean all these systems are so effin simple it makes you sick.
A drunken mongoose could execute them and still we shrug and say things like, "well it sure worked for me".
What the fook is goin' on?
  • #26
  • Apr 29, 2010 10:12pm Apr 29, 2010 10:12pm
Quoting Ted1983
We really should be trying to find out why.
I mean all these systems are so effin simple it makes you sick.
A drunken mongoose could execute them and still we shrug and say things like, "well it sure worked for me".
What the fook is goin' on?
The 'WHY' I believe cannot be answered, each person will have settle on their own belief system and make peace for themselves.

If you go the self-fulfilling prophecy route with Forex being a highly technical market, if not the most technical market then you can see why it would work, lots of people are using them.

If you go the route that 'the brain' operates in the fibonacci sequence then you can say mob / mass psychology will operate on the fib sequence. Since mobs / markets will form their own psychology.

If you go the route that it is all B.S. well then it's all B.S.

I'm sure there several other theories on the subject, but that is what I could think of at the moment.
Don't wish it were easier, wish you were better. ~ Jim Rohn
  • #27
  • Apr 29, 2010 10:19pm Apr 29, 2010 10:19pm
Quoting Ted1983
Ok Waves. Seeing as I've already bitten, let me quote you.

"Newsflash..........news means nothing"- You.

Can you explain the precipitous EUR/USD drop this week in terms of mathematical ratios?

No. Off course you can't.

Was it something to do with the news of Greece being downgraded by S$P?

Yes. Off course it was.

Ladies and gentlemen of the jury, I rest my case.
News can't move price, but market orders can. News may sometimes indicate which type of orders the market will primarily see, last week this was true.

Apart from the fib ratios themselves, the fib guys do have a lot going for them even if they are illogical. The Skunny minions are now practicing the secret $100/month methods taught by Skunny on his private site here on FF, and the majority of the time they do work. By nature, skunny's methods force one to trade with the prevailing current trend.

What are you doing when measure a price swing with a fib? Say price has just completed an upswing, you measure the swing from a swing low to the swing high. What are you encapsulating within that 'fib'? OPEN INTEREST. At each of those price levels there are traders of all sorts in different positions. For price to rise, someone had to sell to the buyers. Even if it was dealers who sold to buyers, they will pass off that inventory to someone else, no matter what though, someone WILL lose and be forced to liquidate.

You can see by looking at the upswing where the biggest winners and losers are potentially sitting (common sense). It could be that those who sold at the bottom of the swing have already stopped out and become buyers, but as we all know, a common tendancy of traders is to wait it out. If the swing is medium term, most of the traders are probably waiting to see what happens next.

Lets say that a second round of buying begins. A new price wave is forming and all the shorts in the last swing are feeling the heat. Many will have their stops just above the last swing high. Here is where the fib ratios can be a general guide. Even if we don't know the volume of the last swing, we can look to see how many price levels were consumed. Lets say the original swing is 100 pips long. The sellers near the top of the swing are feeling the pressure, but their stops probably won't be above the swing point. The sellers below the 50% level are feeling moderate pressure though, the pressure to liquidate increases as you look at lower and lower prices in the swing. Some of them will be forced to take a loss.

Out of all the fibs I've seen, the outer 138.2 extension is usually hit if a swing is broken. It's not a magical number, I think it's just a good average percentage of traders who are taking a loss from the last swing. It's not perfect though, because liquidity is not symmetrical, it's always changing. If you are fibbing a swing containing high volume, say after the daily volume climax, chances are you'll easily hit the outer extensions if a swing is broken because loss covering demand will spread into a time/zone of lower liquidity. On the other hand, if you fib a swing with low liquidity and volume is on the rise, you might not hit your extensions even though your fib is 'triggered.'

The same holds true for the inner fib levels. You will have traders who liquidate their winnings. The winning buyers will become sellers to net out of their positions. If their are new buyers waiting to enter via limits, price probably won't pull back too much. The whole swarm of buyers and sellers has shifted.

To reiterate simply here..When you look at a trending market, a certain percentage of the rise of fall of the market will be always be due to non fundamental demand, i.e. volatility produced by losing traders (opportunity) I could go into the implications of this and that and the other, but then I'd go on all night long.

There is something to fib methods, or statistical averages, that will help you along in your trading. Don't let the lack of pip perfect hits on a fib jade your thinking.
  • #28
  • Apr 29, 2010 10:21pm Apr 29, 2010 10:21pm
LasVahGoose,

You're right there are many explanations. Unfortunately they are mutually exclusive.

Personally I plumped for the "self fulfilling prophecy" line when I first happened upon trading. This line of reasoning is initially satisfying, but doesn't seem to stand up to scrutiny.

How many times do we read post about "following the real money" and "barking with the big dogs"? Are we to belive that major financial institutions and hedgers are pulling fib retracements in metatrader? I think not.

I would gues that the majority of volume is not transacted at fib levels, trendlines etc but at xx00 levels.

If anyone can prove otherwise, please do.
  • #29
  • Apr 29, 2010 10:24pm Apr 29, 2010 10:24pm
Here is something I dug up from my notes on 'why' Forget the source...

Why Fibonacci? We know that people unconsciously identify beauty by facial geometries and physical proportions that possess Fibonacci and symmetric qualities. I believe people identify the significance of opportunities and threats in a similar fashion - probably unconsciously - certain patterns and ratios are attractive or threatening and evoke an emotional response. People start looking for a gas station when their tank is 3/8 full.

Add one more theory to the mix, sort of comes back to how the brain works.
Don't wish it were easier, wish you were better. ~ Jim Rohn
  • #30
  • Apr 29, 2010 10:27pm Apr 29, 2010 10:27pm
Quoting Scotty B
News can't move price, but market orders can.
You wont believe it, but I was waiting for that statement from you.
The point still stands that the news caused the order to be entered.
I'm not against using fibs in principle, just that the fib nazis are mindless.

Great post anyway. Makes masses of sense.
  • #31
  • Apr 29, 2010 10:31pm Apr 29, 2010 10:31pm
Quoting LasVahGoose
Why Fibonacci? We know that people unconsciously identify beauty by facial geometries and physical proportions that possess Fibonacci and symmetric qualities. I believe people identify the significance of opportunities and threats in a similar fashion - probably unconsciously - certain patterns and ratios are attractive or threatening and evoke an emotional response. People start looking for a gas station when their tank is 3/8 full.
I find all that stuff fascinating.
There is an excellent documentary wrt to the facial geometry thing.
They showed how the numbers added up in the faces of beautiful people of all races, both sexes etc.

Nevertheless it can be seen that prices simply don't respect fib levels on any mathematical basis.
  • #32
  • Apr 29, 2010 10:42pm Apr 29, 2010 10:42pm
Example..Fib with volume action..This is what I was explaining in my last post
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  • #33
  • Apr 29, 2010 10:52pm Apr 29, 2010 10:52pm
That would go a long way (probably the whole way) to explaining why long swings seem more reliable. The pressure to liquidate is that much greater the bigger the adverse price movement.
  • #34
  • Apr 29, 2010 10:56pm Apr 29, 2010 10:56pm
Quoting Ted1983
That would go a long way (probably the whole way) to explaining why long swings seem more reliable. The pressure to liquidate is that much greater the bigger the adverse price movement.
Sure, I'd go along with that thinking. Sometimes limit holders get caught off guard pretty severely.
  • #35
  • Apr 29, 2010 11:05pm Apr 29, 2010 11:05pm
Quoting Ted1983
Nevertheless it can be seen that prices simply don't respect fib levels on any mathematical basis.
I can see how that would be an issue for the left-brained systematic types that think of the market as a math formula. I think the fib tool is more geared towards the right-brained person that operates on discretion / intuition.

I wonder if they have ever done a study on that, might be an interesting Poll question.
Don't wish it were easier, wish you were better. ~ Jim Rohn
  • #36
  • Apr 29, 2010 11:51pm Apr 29, 2010 11:51pm
Just wanted to clarify that the question was specifically about 61.8%. I know what Fib retracement is all about, but why is it that people seem to place the most emphasis on 61.8%...as opposed to the other ratios, (23.6%, 38.2%, etc). What is it about 61.8% that makes it stand out from the rest?

I do have to thank everyone for their input so far. I enjoy learning and gathering as much information as possible, and people on here never disappoint!
  • #37
  • Apr 30, 2010 12:00am Apr 30, 2010 12:00am
Quoting fxpipper
Just wanted to clarify that the question was specifically about 61.8%. I know what Fib retracement is all about, but why is it that people seem to place the most emphasis on 61.8%...as opposed to the other ratios, (23.6%, 38.2%, etc). What is it about 61.8% that makes it stand out from the rest?

I do have to thank everyone for their input so far. I enjoy learning and gathering as much information as possible, and people on here never disappoint!
It's part of the golden ratio or section.

Here's the site for fib study. http://www.goldenratio.org/info/
  • #38
  • Apr 30, 2010 12:26am Apr 30, 2010 12:26am
Quoting fxpipper
Just wanted to clarify that the question was specifically about 61.8%. I know what Fib retracement is all about, but why is it that people seem to place the most emphasis on 61.8%...as opposed to the other ratios, (23.6%, 38.2%, etc). What is it about 61.8% that makes it stand out from the rest?

I do have to thank everyone for their input so far. I enjoy learning and gathering as much information as possible, and people on here never disappoint!
When prices retrace, they tend to retrace a certain percentage. It might seem very random to the untrained. However over countless observations, our ancestors have discovered that prices tend to retrace somewhere from 30-60% of an original price movement.

For a very strong trend, prices usually retrace to 30%. For a weak trend, prices can sometiems retrace up to 60%. When retracing, prices tend to fluctuate around this band of 30-60%. Then one day someone discovered fib ratios.

Woalah. History. If you do not dabble in math as much, just understand that prices retrace. Fibs are like indications. A guideline to make you feel safe. It doesn't always work so don't force a fib on every price action. Its a tool. Just use it as such.
  • #39
  • Apr 30, 2010 12:33am Apr 30, 2010 12:33am
Quoting fxpipper
Just wanted to clarify that the question was specifically about 61.8%. I know what Fib retracement is all about, but why is it that people seem to place the most emphasis on 61.8%...as opposed to the other ratios, (23.6%, 38.2%, etc). What is it about 61.8% that makes it stand out from the rest?

I do have to thank everyone for their input so far. I enjoy learning and gathering as much information as possible, and people on here never disappoint!
Why do you think it stands out from the rest?
Don't wish it were easier, wish you were better. ~ Jim Rohn
  • #40
  • Apr 30, 2010 12:57am Apr 30, 2010 12:57am
A quick search through Google will get you the answers on 61.8%, as for the fibonacci way of trading, it works very well for those who use it.
Someone here said it's only proven to work if price reacts right on the level.....why is that?? is that what you have learned so far from trading?
(if it doesn't react right on my level it doesn't work)...bollocks!
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