Why do people use Fibonacci in trading? | Forex Factory

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Why do people use Fibonacci in trading?

  • #1
  • First Post: Edited Apr 4, 2013 10:34pm Apr 2, 2013 7:11am | Edited Apr 4, 2013 10:34pm
I have been questioning myself again and again for a long period of time about Fib retracement.

There is no logical explanation of why it works/does not work. The most answer from people is: "because everyone uses them".

How about you? Do you believe in Fib?
If yes, what is the most reason you think it works, besides the common reason above?
If no, what is your reason?

I personally never used Fib as an indicator, because I think these so called golden ratios are just illusions and do not make any sense in term of trading and market sentiment.

For example:

  1. Elliot Wave may work because it's about psychology facts of how people trade.
  2. S/R works because it indicates where Supply or Demand has exceed its potential so one tries to get back to the equilibrium point.
  3. Trend works because once it's formed, it indicates one country advantage over the other, and it will take a lot of efforts/money for a country to reverse that position.
  4. MA works because... well, as its name: Moving Average. Once a price has broken the MA line - i.e. its equilibrium point/average point/momentum point - that means a new trend has formed and price tends to move away from it.


For Fib, I cant think of any reason. I make up the following theory to explain to myself why people believe in Fib:

  1. initially back in 1800 or so when people started trading, there was no indicator so the government used Fib to drive the market (i.e. if an item price increases +61% its original price, the Gov knows market is having inflation so they start to act to push the price down?)
  2. then people/traders started to use Fib
  3. then these traders became "big boys", over time there are new & more accurate indicatiors but people still use Fib, because these big boys are now familiar with old tools
  4. hence today where people still use this (illogical-nonsense golden ratio) Fib?

back... and more dangerous.
  • #2
  • Apr 2, 2013 8:26am Apr 2, 2013 8:26am
Because it can give us a perspective of possible areas of retraction, convergence and extension of the price.
Together with our strategy can be a good help.

But itīs just like any other indicator/tool, some people like and some people donīt.
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  • #3
  • Apr 2, 2013 9:45am Apr 2, 2013 9:45am
I ever read , the Fibonacci ratios (0.382, 0.500 and 0.618) is like planetary motion ratios (0.38877/0.3902, 0.509 and 0.6151/0.6011). The planetary motions may be of great help to traders in predicting the possible outcomes of market prices over a specified period of time. Or maybe you should read about history of the Fibonacci numbers.

--------
123 trading system
  • #4
  • Apr 2, 2013 9:53am Apr 2, 2013 9:53am
There are different ways one can draw fibs, with that said, you could populate your entire chart with fibs until it's black. Personally I don't think they work. There is an article on the net, (dont have bookmark handy) that does pretty good analysis on fibs and trendlines.
ok Friendo? This is madness!?!? - THIS, IS, FOREX!!!
  • #5
  • Apr 2, 2013 9:54am Apr 2, 2013 9:54am
Quoting pepesan
I ever read , the Fibonacci ratios (0.382, 0.500 and 0.618) is like planetary motion ratios (0.38877/0.3902, 0.509 and 0.6151/0.6011). The planetary motions may be of great help to traders in predicting the possible outcomes of market prices over a specified period of time. Or maybe you should read about history of the Fibonacci numbers. -------- 123 trading system ("http://www.forexstrategi.com/2013/04/123-trading-system.html")
Interesting thing is that the fifty is not a fib but it is the only one that works with any regularity.
  • #6
  • Apr 2, 2013 10:33am Apr 2, 2013 10:33am
Quoting kbp
I think these so called golden ratios are just illusions
You have the right answer.

The problem is the people believe. This is exactly why many levels (fibo, daily s/r, etc ...) works.
MT4/MT5 EAs/Indicators/Alerts coder
  • #7
  • Apr 2, 2013 10:47am Apr 2, 2013 10:47am
Once you understand the picture below, than you'll understand why the Golden Ratio works in the markets. Just like the golden ratio works with everything else in life. And like the other poster said, there's different ways of connecting your fib lines. Think outside of the box. Fibs don't lie, liars just go fib.
Attached Image
Time turns trend. - W.D. Gann
  • #8
  • Apr 2, 2013 11:24am Apr 2, 2013 11:24am
Quoting FerruFx
You have the right answer. The problem is the people believe. This is exactly why many levels (fibo, daily s/r, etc ...) works.
Hello Sir

Is it available to download from any link? I am also becoming interested like most other traders to use it.

Regards
  • #9
  • Apr 2, 2013 12:25pm Apr 2, 2013 12:25pm
Here's an example of what I'm talking about. What is every trader told to do, when they are new to the markets, in regards to fib retracement training? Connect the bottom to a top in an uptrend, etc....... Why not connect a top with another top? Then you'll see where the next potential top could be at? There's a lot of different ways to play with this. Just open your mind. I used to be the same way when I was first introduced to fib ratios. "Oh, these things don't work, they're just fibbing to me." Then my Gann journey opened my eyes on how to see things differently. The picture below is where I connected two swing tops to find the next potential top. And sure enough, look where you could have taken profit at two months ago, when the E/U topped out at the beginning of February, then shorted from there. Connect two bottoms to find the next potential bottom, etc..... Try it on a one minute chart live, and watch what price does around the golden ratio.
Attached Image (click to enlarge)
Click to Enlarge Name: connectingtops.gif Size: 33 KB
Time turns trend. - W.D. Gann
  • #10
  • Apr 2, 2013 1:49pm Apr 2, 2013 1:49pm
One more before I go. Have you ever noticed how some people like to do things half ass backwards? Why not do it with fibs, too? Same chart but connecting the same swing tops backwards. Then you trade accordingly.
Attached Image (click to enlarge)
Click to Enlarge Name: anotherway.gif Size: 33 KB
Time turns trend. - W.D. Gann
  • #11
  • Apr 2, 2013 5:29pm Apr 2, 2013 5:29pm
Think about it guys!

IF either Fibonacci, W. D. Gann, Harmonic or Arithmetic retracements "worked", wouldn't there be some research to easily support that fact?

There is a plethora of information from multiple markets out there, data overload if you will; computers with power out of this world, literally, and software to analyse it all.

Where is the proof? I don't mean you should post a chart to explain it to me, I mean, is there any scientific proof that a 0.38 retracement is better than any other retracement?

Mathematically it should be easy to prove, it should exist on the internet somewhere, right?

OK, shoot me down, but please bring some links, data, bell curve chart or something...

It takes a lot for me to IGNORE you, but you can try.
  • #12
  • Apr 2, 2013 6:17pm Apr 2, 2013 6:17pm
With all respect.
Itīs not because you do not know how to use a tool, this tool does not work.
Enter Signature
  • #13
  • Apr 2, 2013 6:51pm Apr 2, 2013 6:51pm
Quoting gomes
With all respect. Itīs not because you do not know how to use a tool, this tool does not work.
You did not explain very well, it does work, as do ALL retracements, SOME of the time, my statement claims that there is no statistical evidence that a Fibonacci retracement is any more significant that any other ratio of retracement you wish to trade eg arithmetic retracement of 25%, 50% and 75 %

Similarly, ALL indicators work SOME of the time, but who can claim they work all of the time, that would be Holy Grail

It takes a lot for me to IGNORE you, but you can try.
  • #14
  • Apr 2, 2013 7:08pm Apr 2, 2013 7:08pm
Quoting Red Herring
Hello Sir Is it available to download from any link? I am also becoming interested like most other traders to use it. Regards
What are you talking about ?
MT4/MT5 EAs/Indicators/Alerts coder
  • #15
  • Apr 2, 2013 8:02pm Apr 2, 2013 8:02pm
Fib levels do not "work". A good trader, however, will learn how to make trade decisions using fibs. Here is an example of how I have been making fibs work for my trading. The following is a 4H chart, E/$. Place stops just above the .786 and wait for your targets to be hit:
Attached Image (click to enlarge)
Click to Enlarge Name: euro.gif Size: 45 KB
  • #16
  • Apr 2, 2013 9:06pm Apr 2, 2013 9:06pm
Quoting GEfx
Fib levels do not "work". A good trader, however, will learn how to make trade decisions using fibs. Here is an example of how I have been making fibs work for my trading. The following is a 4H chart, E/$. Place stops just above the .786 and wait for your targets to be hit: {image}
Your entry criteria? Looks like 50% by the circles on the chart; you realize that is not a Fib number, only arithmetic?

May as well change your stop to 80% , that is nice round number and easier to calculate

How do you choose the lows & high to place the FIBS, daily or just when it looks right?

Any filtering for trend?

Thanks, works for you that is great, those numbers give you confidence to engage the market and win.

But is it Fibonacci or are you just a good trader, using sensible money management, small stops and realistic targets?

Something to think about
It takes a lot for me to IGNORE you, but you can try.
  • #17
  • Apr 2, 2013 9:37pm Apr 2, 2013 9:37pm
Quoting Erebus
You did not explain very well, it does work, as do ALL retracements, SOME of the time, my statement claims that there is no statistical evidence that a Fibonacci retracement is any more significant that any other ratio of retracement you wish to trade eg arithmetic retracement of 25%, 50% and 75 % Similarly, ALL indicators work SOME of the time, but who can claim they work all of the time, that would be Holy Grail

agree with your quotes,,

Similarly, ALL indicators work SOME of the time, but who can claim they work all of the time, that would be Holy Grail

salaam
  • #18
  • Apr 2, 2013 10:44pm Apr 2, 2013 10:44pm
hm... reading until now but still don't have a clear logical explanation of why Fib "sometimes" works.

I know it's
(a+b)/a = b/a = delta

but it's just pure math and this delta does not have any role in market price / market sentiment (unless there's a secret agreements between 2 governments like US-Canada that at this 68/32 level they'll reverse the price on UCAD).

We can make up any number and sometimes it will work because price soon or late must pass that points. E.g. let says we have 40% level, the market is ranging, price surely will pass this over and over until the trend is formed... so we'll say this works???

Anyway about:
Quoting FerruFx
The problem is the people believe. This is exactly why many levels (fibo, daily s/r, etc ...) works.
I reckon S/R works because the past points indicate Supply and Demand of the market where one tries to get back to equilibrium points hence a high possibility of price reverse.
back... and more dangerous.
  • #19
  • Apr 3, 2013 12:40am Apr 3, 2013 12:40am
The fact that it is so popular means that it is utterly useless (basically like any other TA tool)
  • #20
  • Apr 3, 2013 1:12am Apr 3, 2013 1:12am
Quoting kbp
We can make up any number and sometimes it will work because price soon or late must pass that points.
Exactly. Fibo or any magic levels based on numbers are just illusional ...
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