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Why do people use Fibonacci in trading?

  • #61
  • Apr 3, 2013 10:15pm Apr 3, 2013 10:15pm
Quoting Forexia
The source is the relationship of the Fibonacci number sequences and the Elliot Waves observed in the market cycles.
The market is absolutely not driven by Fibo or EW or any mathematical/mystical numbers.

You can find in some waves that the price correspond to certain numbers ... because of people believe and use them ... but not because of maths.
MT4/MT5 EAs/Indicators/Alerts coder
  • #62
  • Apr 3, 2013 10:32pm Apr 3, 2013 10:32pm
I think there are some flaws here

Quoting Forexia
...The Golden Ratio, .618, is the only number that will also be equal to its inverse when added to 1. So, in other words, 1 plus .618 is 1.618, and the inverse of .618 is also 1.618.
Basically for each nature number there is a ratio that will make the condition above, for example 99 + 0.01009998 = inverse of 0.01009998

Hence we can make up any spiral with different range, using a random ratio. The only special thing about Fib is because it already obtains the first nature number "1", unlike my example which is number 99. So any good mathematician can make up a sequence of numbers that have the same ratio when adding up (but not starting from 1 because if so, it's already Fib sequence).

And put away all of those maths, why is this specific ratio .618 attracting price and becomes retracement level in the market as people usually think?
back... and more dangerous.
  • #63
  • Apr 3, 2013 10:38pm Apr 3, 2013 10:38pm
Quoting kbp
So any good mathematician can make up a sequence of numbers that have the same ratio when adding up (but not starting from 1 because if so, it's already Fib sequence). And put away all of those maths, why is this specific ratio .618 attracting price and becomes retracement level?
MT4/MT5 EAs/Indicators/Alerts coder
  • #64
  • Apr 3, 2013 11:03pm Apr 3, 2013 11:03pm
Quoting FerruFx
The market is absolutely not driven by Fibo or EW or any mathematical/mystical numbers. You can find in some waves that the price correspond to certain numbers ... because of people believe and use them ... but not because of maths.

i strongly agree with the your quotes,, sir,,

The market is absolutely not driven by Fibo or EW or any mathematical/mystical numbers.

salaam
  • #65
  • Apr 3, 2013 11:55pm Apr 3, 2013 11:55pm
There are plants that grow leaves that grow directly from each other on the stalk, then the next pair grow directly across from each other on the stalk, but at a 90 degree angle from the original pair. Some plants grow a leaf, then each leaf from then on out grow as far away as possible from the previous leaf. Almost like a star. The fib numbers are real, otherwise they wouldn't exist.

To take that idea to trading, we'd have to figure out which player is what type of plant, so to say. Some plants grow this way, some grow that way. Some trees are taller than others, while others are shorter than others.

So, if you know what type of "plant" each big player is, you're that much more informed.
Play the players, not the cards.
  • #66
  • Apr 4, 2013 9:22am Apr 4, 2013 9:22am
Quoting FerruFx
What are you talking about ?
When I asked I did not know where to get Fibonachi. Now I know it is in side MT4, right?
  • #67
  • Apr 4, 2013 9:23am Apr 4, 2013 9:23am
Quoting Red Herring
When I asked I did not know where to get Fibonachi. Now I know it is in side MT4, right?
Yes Fibonacci is a standard tool in the MT4 platform.
MT4/MT5 EAs/Indicators/Alerts coder
  • #68
  • Apr 4, 2013 10:18am Apr 4, 2013 10:18am
Only because sooooooooo many traders are using it to determine price levels...so it becomes a self-fulfilling prophecy. Same goes for Murrey Math.
  • #69
  • Edited 7:39pm Apr 4, 2013 11:37am | Edited 7:39pm
Quoting kbp
And put away all of those maths, why is this specific ratio .618 attracting price and becomes retracement level in the market as people usually think?
Apparently this is the ratio that is hardwired in our brains to believe this is where changes will take place, another cycle will begin and in many ways a cut-off point. The Bell curve or the normal distribution shows that the standard deviation of the means can occur anywhere between -66% to 66%. The passing mark for any academic tests or exams is usually 60%. We believe for anything to be decided, a 2/3 majority (60%) is required. Is this any coincidence that without ever referring to the Fibonacci numbers that naturally we come up with these crucial points in our daily lives?

In nature, the examples are numerous. Besides the ones that we know, the flower petals, the spiral, there are the branching in trees, arrangement of leaves on a stem, the fruitlets of a pineapple,[9] the flowering of artichoke, an uncurling fern and the arrangement of a pine cone. They are all around us. They all conform to the Fibonacci number sequence or ratios in their own ways. Yes there will always be exceptions found but to deny this general pattern is not correct.

Is there self-fulfilling prophecy involved with regards to financial market behaviour caused by traders using fibonacci numbers? Yes. Do fibonacci number sequence explain how market cycles are formed? You betcha! Now using fibonacci number sequence as a tool for trading, that's another story. BUT this thread's title is "WHY do people use Fibonacci in trading?" These are the reasons why. [
Make your losses in demo. Earn your profits live.
  • #70
  • Apr 4, 2013 2:47pm Apr 4, 2013 2:47pm
Quoting Forexia
But the problem with using fibo is that you can draw so many fibo lines and get retracement ratios out of them, that the chart soon get inundated in them and you don't know which lines are valid.

Agreed. That's the key. Thanks for sharing your knowledge on this subject.
Time turns trend. - W.D. Gann
  • #71
  • Apr 4, 2013 4:22pm Apr 4, 2013 4:22pm
So there seems to be some kind of strange misunderstanding at FF that the market is "driven" by some kind of indicator or something.

Let's just take a minute to remember what the market is and what it is not. The market is just that... a market, of traders, some want to buy some want to sell. It is not a magical entity that reacts off special formulae or secret ingredient.

The Fib retracement tool is just a tool... it gauges the strength of a corrective wave in a trend. Why fib numbers... I'm not sure; it could just have easily been 25% 50% and 75% levels... but it is what it is. The market is made up of human traders who use human designed tools... the fib retracement indi is one of them.

It's the same reason moving averages seem to work and stochastics and RSI seem to work... sometimes... because traders use them... but then when fear or greed... but mostly fear, take over - well it all goes out the window because... and you must remember this; we are just dealing with a human market. It is not magic, it is not special, it is essentially just an auction. Please remember that kids!

Cheers!


Quoting kbp
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....
  • #72
  • Apr 4, 2013 4:57pm Apr 4, 2013 4:57pm
Couple things: what counts as working? Does the number have to stop on a dime at the fibo, or just in the area? If it's just the area, then does that mean using 25%, 33%, 66%, and 75% works just as well (hint: it does if you are just using "area" as the criteria)? And if that's the case, does that mean that fibo numbers are actually irrelevant? And are simply just lines on a chart drawn reasonably distanced apart?


You can take the classic fibonacci numbers used in trading and adjust them slightly (add or subtract a few percent) and call them smittens numbers and they will work just as well as fibo numbers. Sometimes price will even stop exactly on the random non-fibo number you've drawn on your chart! Probably just about as often as it does for the actual fibo number.


What does that tell you? That when fibonacci numbers "work," it's more coincidence than anything, just like if you used the random number of 64.3 instead of 61.8 and price happened to stop exactly on the line.


I can draw all sorts of silly patterns on a chart and extend them beyond where price currently is and tell someone to fade the pattern when price approaches it, and there's a good chance it will work on occasion, despite it being based on absolutely nothing.


It's possible the self-fulfilling prophecy concept is true, but in a market as big as FX with so many different participants, many non-speculative, I find it hard to believe that billions and billions of dollars are being thrown around because a ratio that happens to occur in nature was subjectively thrown on a chart.
  • #73
  • Apr 4, 2013 5:06pm Apr 4, 2013 5:06pm
Quoting DanUK
So there seems to be some kind of strange misunderstanding at FF that the market is "driven" by some kind of indicator or something. Let's just take a minute to remember what the market is and what it is not. The market is just that... a market, of traders, some want to buy some want to sell. It is not a magical entity that reacts off special formulae or secret ingredient. The Fib retracement tool is just a tool... it gauges the strength of a corrective wave in a trend. Why fib numbers... I'm not sure; it could just have easily been 25% 50%...
Well said. I guess some here think the thermometer in the back yard is making it hot or cold outside, rather than just measuring the temperature. Fibs depict a standard set of banking/trading processes that have existed (at least) since I first looked at a chart. As I have said here several times, fibs do not "work". A trader can use them, however, to gauge the market action that fits market structure, and trade with them until...they stop working (which means, the bankers are on to something else).
  • #74
  • Apr 4, 2013 5:29pm Apr 4, 2013 5:29pm
Thank you GEfx. I was about to post when I took the trouble to read yours. This was my version: "It doesn't really matter and quite difficult for me to prove or disprove. You ignore them at your peril because in technical analysis we use them as a measuring stick. In the same way that when you go to buy timber it is 4" x 2" or gas is measured in gallons or litres."
Gone to a better place
  • #75
  • Apr 4, 2013 5:37pm Apr 4, 2013 5:37pm
Quoting smittens4212
Couple things: what counts as working? Does the number have to stop on a dime at the fibo, or just in the area? If it's just the area, then does that mean using 25%, 33%, 66%, and 75% works just as well (hint: it does if you are just using "area" as the criteria)? And if that's the case, does that mean that fibo numbers are actually irrelevant? And are simply just lines on a chart drawn reasonably distanced apart? You can take the classic fibonacci numbers used in trading and adjust them slightly (add or subtract a few percent) and call them...
These are great questions. Does PA have to stop on the fibo exactly? Only if all of the thousands of bankers that are trading at that time agree with that price level. They typically do not, so the results will vary. The billions of dollars are being thrown around according to well defined and strictly adhered-to banking/trading processes, and have nothing to do with fib numbers. Fib numbers/levels help those of us not trading for DB or Citi, who are on the outside, understand that those processes are being worked, and when those processes are over. It's the processes that work, and fibs are one way to measure that work. If you have another way, good for you and trade the heck out of it. Good trading!
  • #76
  • Apr 4, 2013 6:18pm Apr 4, 2013 6:18pm
These lines that I have on my D1 EUR/NZD chart come from different fib levels. Fib levels are just like credit cards and bank loans. You just have to know where and how to apply.
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Time turns trend. - W.D. Gann
  • #77
  • Apr 4, 2013 7:39pm Apr 4, 2013 7:39pm
Same pair as above but on H1. Once again. How applied.
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Time turns trend. - W.D. Gann
  • #78
  • Apr 4, 2013 7:40pm Apr 4, 2013 7:40pm
self-fulfilling prophecy : a term bandied about by muppets who have no actual data to back-up their make-believe hopes regarding their self-applied mysticism and delusions.
Congratulations ScalaFX for coming out of the closet!
  • #79
  • Apr 4, 2013 7:43pm Apr 4, 2013 7:43pm
PIVOTS !
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When the Joker is in the deck.. fear not and play it well
  • #80
  • Apr 4, 2013 7:51pm Apr 4, 2013 7:51pm
Quoting nubcake
self-fulfilling prophecy : a term bandied about by muppets who have no actual data to back-up their make-believe hopes regarding their self-applied mysticism and delusions.

"Those who are unaware are unaware of being unaware". - author unaware.
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Time turns trend. - W.D. Gann
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