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Why 61.8%?

  • #201
  • May 2, 2010 5:30pm May 2, 2010 5:30pm
A quick read of this thread proves that:

"Christ, What an Asshole!" is the Answer to any previous post... including mine

It works for New Yorker cartoons, comics, and now threads...

http://www.robertsinclair.net/comic/asshole.html
In trading, there is no bullshit. You either make money or you don't.
  • #202
  • Edited 6:02pm May 2, 2010 5:41pm | Edited 6:02pm
Presumably everybody's agreed that no levels - whether they are S/R from prior candle highs/lows; fibos; pivots; round numbers; trendlines; widely used MAs; whatever - are respected, to the pip, 100% of the time.

Consequently, isn't the important question "how accurate does any level need to be, for it to provide a worthwhile contribution to an overall method that's on-balance profitable?"?

Are fibo levels more frequently accurate in picking reversal points than some of the other levels that I mentioned?

Next question (to those who believe in fibos): does anybody know WHY they 'work'?
Is it:
a) expectation of self-fulfilling prophecy (i.e. enough heavyweight traders use them, creating the necessary orderflow)?
b) they provide an 'average' statistical measure of herd behavior (if so, then why fibos, and not some other arbitrary ratio)?
c) because a majority of traders succumb unwittingly to the irresistible forces of nature?

Or is that they merely provide the trader with his own familiar, visual points of reference, or 'road map', around which he further analyzes price action? (in which case, would almost anything else suffice?)

Or is there some other reason?

Just curious.
  • #203
  • May 2, 2010 7:03pm May 2, 2010 7:03pm
Quoting Ted1983
Here is a simple way to use a retracement tool (with no fib ratios in sight);

Current range is below previous range, therefore trend is down.
No magical order of nature hocus pocus.
Quoting hanover

Are fibo levels more frequently accurate in picking reversal points than some of the other levels that I mentioned?

Next question (to those who believe in fibos): does anybody know WHY they 'work'?
If the fib retrace lines are drawn only for their skillful maker, then they may be best. I often have trouble believing in another's, because there's no exacting progression of the price-time line along them.

Fibs, to me, are very close to working if you have the skill to put them in the right place. On the argument that fib's already run through much of nature's patterns: Maybe this is why they do seem to work in some instances.
Mostly though, one counts heavily on the intuition of experience to draw fib retraces, so that their lines may be at once trustable and approximate. To the eye, it is not obvious that connecting a fib retrace's two tiny dots will produce lines that approximate the chart's next moves. The price-time line's progression does not naturally flow through a fib retrace, even as it does hit a majority of the levels / pivots.

Versus this, at least for pairs symbols (or at least for g/u), lines that originate from pivots of small, balancing areas,1) intersect the price-time line in patterns that, each time the former hits the latter, changes in a visually rational way;
at the same time the entire line, just as with the fib retrace, 2) aligns the entire way with most of the chart.

I got the first, not the second, ideal done okay on the balancing lines; my lines (at least in their current rendition) are often too few or show only a minor pivot. Also, I put in horizontal balance lines artificially (wouldn't use them, too little causality to get direction from them; the horizontals depend on the price-time line's reactive pattern too much), to compare to fib retrace lines:
Attached File(s)
File Type: tpl 05022010 fib retrace vs. horizontal balance lines.tpl   20 KB | 257 downloads
and one picture from it .

Long story short, fib retraces are approximate: Fine for the maker, difficult for the viewer.
  • #204
  • May 2, 2010 9:43pm May 2, 2010 9:43pm
if someone said that 0.729 and 0.222 were magical numbers... made a tool... used this tool as y'all currently do with fibs... would they then still be making the same arguments as currently being made.

"you need to put them in the right spot"

"you need to understand that it's not perfect"

"blah blah blah"

serious question. take your fib levels and set them to something else. is it still profitable for you? if yes, then what does this suggest about the nature of the numbers chosen. if no, then we have something interesting to look into.
Congratulations ScalaFX for coming out of the closet!
  • #205
  • Edited 11:55pm May 2, 2010 11:44pm | Edited 11:55pm
I have to admit that I do use fib numbers when playing roulette. With less than stellar results. But then again the ball does not know its landing on a fib number.
Look Sharp/Trade Tight
  • #206
  • May 3, 2010 12:05am May 3, 2010 12:05am
Quoting Ted1983
Thanks mate, but there is really no side to take.

Look at a price chart, retracements do not land on fib' ratios.

I said before that I think that fib retracements can be used, but that doesnt mean they are mathematically present in the market structure.

I really get pissed off when people like Waves come and deliberately misinterpret posts and cast aspesions about, "what kind of person" I am.

The discipline of rigorous mathematical analysis is about as far from "eyeballing" a chart as you could be. I agree with Ted, and I believe what he is saying is that when you speak precisely and mathematically, Fibos do not show up in the market. Missing a fibo by a fraction will throw your model out the window. Which is why parametric studies fail hard when they attempt to study the market. You'd do better with a degree in sociology and a couple of years experience with price action than a PhD in statistics; as a trader.

Of course if someone can find a mathematical proof showing Fibos show up consistently (I'm not holding my breath) I would be persuaded to recant. But as for now, the consensus on Fibos is that they are a self fulfilling prophecy amongst the markets. That is, when they choose to fulfill themselves. And what discipline of study would that phenomenon fall under?

Mass Psychology.
Thank you Lux!
  • #207
  • May 3, 2010 3:04am May 3, 2010 3:04am
Quoting hanover
Presumably everybody's agreed that no levels - whether they are S/R from prior candle highs/lows; fibos; pivots; round numbers; trendlines; widely used MAs; whatever - are respected, to the pip, 100% of the time.

Consequently, isn't the important question "how accurate does any level need to be, for it to provide a worthwhile contribution to an overall method that's on-balance profitable?"?

Are fibo levels more frequently accurate in picking reversal points than some of the other levels that I mentioned?
Like you say nothing is 100% accurate, the Holy Grail still eludes us.

For me ratios provide a reason to buy/sell/cover around certain levels and a clear framework to trade within. They're more of a guideline to potential areas of reversal rather than pinpointing an exact price, and overall they've proved to be reasonably reliable for that purpose.


Quoting hanover
Next question (to those who believe in fibos): does anybody know WHY they 'work'?
Is it:
a) expectation of self-fulfilling prophecy (i.e. enough heavyweight traders use them, creating the necessary orderflow)?
b) they provide an 'average' statistical measure of herd behavior (if so, then why fibos, and not some other arbitrary ratio)?
c) because a majority of traders succumb unwittingly to the irresistible forces of nature?

Or is that they merely provide the trader with his own familiar, visual points of reference, or 'road map', around...
For me, all of the above

There is no denying that the Fibonacci sequence exists, the question seems to be whether it exists in markets. There's no reason why it shouldn't, after all markets are made up of people, so if we're going to use ratios then why not use Fib ratios as reference points rather than just some arbitrary number?

Bottom line is I find they have an uncanny accuracy, particularly where there's confluence, too much to dismiss as just coincidence.

People use all sorts of weird and wonderful tools in their trading, I can't really understand why so many people get upset over traders who use ratios effectively, strikes me as being nothing more than frustration a lot of the time.
  • #208
  • May 3, 2010 4:06am May 3, 2010 4:06am
Try this

Abstract:

There is a widespread belief in financial markets that trends in prices are arrested at support and resistance levels that are to some degree predictable from the past behaviour of the price series. Here we examine whether ratios of the length and duration of successive price trends in the Dow Jones Industrial Average cluster around round fractions or Fibonacci ratios. We identify turning points by heuristics similar to those used in business cycle analysis, and test for clustering using a block bootstrap procedure. A few significant ratios appear, but no more than would be expected by chance given the large number of tests we conduct.

Roy Batchelor and Richard Ramyar
Cass Business School, City of London
September 2006
  • #209
  • Edited 5:19am May 3, 2010 5:18am | Edited 5:19am
Hi,

Just wanted to ask a question about the value of the study that Jonty has linked to within his post. I read as far as the Elliot Wave section and they have made errors in the labelling and how to measure turning points using fib ratios and Elliot waves.

If they cannot even understand how Elliot wave works and how fib ratios work within Elliot wave then how can we know that they understand how to use fib ratios properly thus in my opinion it devalues any research they have done on retracements and in the end how can you trust their research when they do understand the basics of fib ratios.

Also as to the discussion that fibs are self fulfilling, I have question.

As it generally excepted that it was Elliot that introduced the concept of fib ratios to the financial market in the 40's. And fibs only really started gaining in popularity in the seventies, how come charts of the djia still had retracements and expansions related to the fib ratios in the 20's and 30's?

Just my thoughts.
  • #210
  • May 3, 2010 5:33am May 3, 2010 5:33am
Quoting Nabi
Hi,

Just wanted to ask a question about the value of the study that Jonty has linked to within his post....
Hi mate

Well it's good to see at least some people are able to engage in intelligent discussion! This thread has over 200 posts in it and about 1/10th say anything coherent IMO... Anyhow - it is interesting that you believe the study uses Fib / Elliot waves incorrectly... there are about 7 pages of references at the back end of the paper, I wonder if there might be something to chase up there.

I am wholly unqualified to support or oppose your claims about the elliot wave thing - Elliot Waves, Gann theory, MACD/RSI - it's all hocus pocus to me.
  • #211
  • May 3, 2010 6:27am May 3, 2010 6:27am
Hi,

I am not against studies generally but this study seems to mix and matches different methodologies to test fib retracements.

I would be interested in seeing a proper study on fib retracements and expansions by somebody that knew how to use them correctly.

I had a look at the their references and I have read more than a few on the list but going though their study again it looks to me that they did not complete understand the methodologies they where using as a reference.

So the study makes some good points about round numbers which have been made numerous times here on FF and in other studies. The rest of the study has very limited value and IMHO cannot be taken seriously.

So to me this is like someone who says that they have a study saying a gun is not a very efficient weapon, and then you find in the study that they have been using the gun to bit someone over the head!!!

But that is the problem with the internet, you can find a paper or study proving or disapproving anything you want.

Personally I do not use MA's, MACD, RSI but I know successful traders that use them. I feel that everyone has have to find a method, adjust it so it suits their style (i.e. make it their own method) and then trade it.

It is like pivots, I used to use them and they worked well for me. But I found pivots along with s/r lines, trendlines, yesterday high close and elliot wave the chart was too busy and whilst I was profitable. I found it easier to manage my positions without them and therefore I was more profitable without them.

That does not say that they do not work but it suits my style better not use them. If I was going back to just trading pure breakouts and trendline breaks then I would add pivots to my charts in a flash.

For anyone to say something that does not work without learning how to use the tool correctly (whether that is fibs, macd, BB's, pivots) and then testing it thoroughly is not really adding anything to the conversation.

People need to find the right tools for their style of trading. I feel that traders can do this by learning the correct way to use them and then testing them rigorous until they feel that tool can add value to their method.
  • #212
  • May 3, 2010 6:48am May 3, 2010 6:48am
Quoting Nabi
If they cannot even understand how Elliot wave works and how fib ratios work within Elliot wave then how can we know that they understand how to use fib ratios properly thus in my opinion it devalues any research they have done on retracements and in the end how can you trust their research when they do understand the basics of fib ratios.
This is an interesting point. I've seen a few academic studies that suffered from the same problem. Most researchers want a reproducible and mechanical approach to identifying swing points, and this is far more difficult than they perhaps imagine for those without prior market knowldge. When you look at the findings of this type of research, it generally concludes that fibs are useless, and thats hardly surprising really.

Having said that, I've seen studies from academics where "market participants" where asked to retrospectively identify waves from which fibs where measured. If you read these studies, you get all sorts of bizarre justifications as to why some waves are extended or shortened, or rules retrospectively modified in hindsight, ratio's oscillating between gemetry based on the square and the circle etc. Even so, when subjected to statistical scrutiny, fibs still fail.

Worse still are studies where the validity of fibs is correlated against the performance of some theoretical trading system based on fibs, taking absolutely no account of exit strategy, position sizing etc. Acedemic studies are generally exceptionally poor and miss the point by miles.

For years I used fibs, and I still do, even despite knowing that statistically they are completely invalid. They're an approximation of what might happen, there might be some validity in confluence, but its pretty weak evidence.

I'm perfectly happy to acknowledge that I might be missing a piece of the puzzle, but the facts are if you subject the published work of the likes of Prechter, Miner, Pesavento et el to scrutiny, its all complete nonsense.

Those guys (and one or two on this thread) are making a fast buck from the gullible, and good luck to them, so perhaps we shouldnt take their work too seriously, but I do believe my own research findings, and I'm 100% confident that a fib level has no more statistical significance than any other level drawn at random. You can say the same thing about a lot of Technical Analysis, very little of it provides any sort of tradable edge and I say that as someone who makes my living exploiting the tiny edge that it does provide.

I suspect that if I where to change the ratio's to completely arbitary values that those using fibs successfully would still continue to be successful.

The analogy you make about hitting someone over the head with a gun sums up the situation perfectly !
  • #213
  • Edited 7:28am May 3, 2010 7:16am | Edited 7:28am
It doesn't matter what Dr.PHD, Mr. Mathematician or your Aunt Nelly from East Burning Stump, Nowhere says or thinks.... all that matters is , do they work for you?

Regardless of what anyone thinks regarding the veracity of Fibs, there's people using them and making money doing so. I personally don't give much weight for lagging indicators, but I know folks who successfully use them. Most folks here scoff at planetary aspects, but I know a trader living in South America, who I've personally watched call trades hours and days in advance. Does it work? It does for him! No one can master a tool at first touch, it takes time like everything else, and the only way you will know if it works for you is to pick it up and learn it...... study and know the tool.

All that being said, the only persons opinion that matters regarding any trading tool is yours. As you, and you alone are responsible for all your trading decisions. Trying to convince others of your methods is wasted breath, and seeking others approval says you haven't done your homework.

regards,
  • #214
  • May 3, 2010 7:40am May 3, 2010 7:40am
Hi auxesis, these people have compiled a lot of academic evidence that fibs do not work, so I think it's time to rethink this issue, because this trade I was in this morning on the E/J (long at 124.38, stop now at 124.78) is not based on anything real, just magic and a result of random market actions:

Attached Image (click to enlarge)
Click to Enlarge Name: ey.gif Size: 20 KB


Please, do not believe any of this fib stuff, they just do not work!
  • #215
  • May 3, 2010 7:55am May 3, 2010 7:55am
Quoting GEfx
Hi auxesis, these people have compiled a lot of academic evidence that fibs do not work, so I think it's time to rethink this issue, because this trade I was in this morning on the E/J (long at 124.38, stop now at 124.78) is not based on anything real, just magic and a result of random market actions:

Attachment

Please, do not believe any of this fib stuff, they just do not work!
GE,

I personally reference fibs on retracements and extensions, they are not the determining factor, but I like to know where they fall. My first mentor thought both axis, price and time, moved to the measure of fibs and I watched that man carve the markets like a Christmas Turkey.

The purpose of my earlier post was to point out that what matters is the individual. When a trader reaches the point that they understand the what and why of their trades, then others opinions about their methods are meaningless.

regards,
  • #216
  • May 3, 2010 7:57am May 3, 2010 7:57am
Quoting auxesis
GE,

I personally reference fibs on retracements and extensions, they are not the determining factor, but I like to know where they fall. My first mentor thought both axis, price and time, moved to the measure of fibs and I watched that man carve the markets like a Christmas Turkey.

The purpose of my earlier post was to point out that what matters is the individual. When a trader reaches the point that they understand the what and why of their trades, then others opinions about their methods are meaningless.

regards,
I could not agree with you more. Good post my friend!

Edit: square at 125.08. I sure wish these fib things worked for me -- lol.
  • #217
  • May 3, 2010 8:02am May 3, 2010 8:02am
Quoting GEfx
Hi auxesis, these people have compiled a lot of academic evidence that fibs do not work, so I think it's time to rethink this issue, because this trade I was in this morning on the E/J (long at 124.38, stop now at 124.78) is not based on anything real, just magic and a result of random market actions:

Attachment

Please, do not believe any of this fib stuff, they just do not work!
I would love to be proven wrong on fibs. Mind to share your stats with i.e 100 trades, using fibs as a main tool ?
Measure twice, cut once
  • #218
  • May 3, 2010 8:07am May 3, 2010 8:07am
Quoting auxesis
GE,

what matters is the individual. When a trader reaches the point that they understand the what and why of their trades, then others opinions about their methods are meaningless.

regards,
Amen....
Those that say do not know. Those that know do not say.
  • #219
  • May 3, 2010 8:15am May 3, 2010 8:15am
Quoting aediaz1
I would love to be proven wrong on fibs. Mind to share your stats with i.e 100 trades, using fibs as a main tool ?
Hi, I am not saying you are wrong, just that they can be a great tool if you know how to use it. I use fibs and trend lines to catch patterns, and am very much a believer in PA vs technical indicators. In 100 trades, I will make a lot of money, but will not state % because I will then be asked to prove it, and I will never share book information on a public thread. There are much better, more experienced traders on FF who can trade me under the table, so I do not want to act like the big king trader here. But, I am up 70 pips so far on a day the London banks are closed. Looking for the next one. Good trading to everyone. I am leaving this thread now because I am not interested in any more arguements. Good luck to you all!
  • #220
  • May 3, 2010 8:22am May 3, 2010 8:22am
interesting how much disagreement there is. if it was clear-cut then the arguments would be clear-cut. honestly this is like a religion debate.

here's a thought that's just CRRRRRRAAAAZY.... maybe the secret behind all the magical and faithful fibs for those who seem to be in love with them are not that they work, but instead that they help to keep you OUT of the market?

left-field.
Congratulations ScalaFX for coming out of the closet!
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