Where is the logic behind applying Fibonacci to trading? | Page 11 | Forex Factory

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Where is the logic behind applying Fibonacci to trading?

  • #201
  • Feb 19, 2016 4:38am Feb 19, 2016 4:38am
Quoting bagman
they have to be so wide that they cover 40-70 in this chart to have any predictive function.
I want to address this final point because in my view, it's the single most important one. It's a semantic debate but believe me, you really should consider dismissing the use of the word "predictive" in your trading vocabulary. There's nothing "predictive" in retail trading, nor should there ever be, until a trader actually enters the market. Then and only then can the word "predict" be used, in as much as the trader "predicts" with a degree of probability that his trade will either go to target or take him out for a controlled loss. This may all sound a bit anal but it's a "mindset" thing to tackle the inherent problem of traders slipping into the behaviour of predicting where the market will turn and also placing orders there to be subsequently burned to a cinder in the process (oftentimes because trading in this fashion they over-leverage and don't know where to put their stop).

The fib tool is simply an indicator to show those that wish to use it where the market may turn on the retrace. An experienced trader will trade into the turn if price-action tells him to. I found the fib tool interesting at first but only in as much as it "crow-barred" my eyes into looking beyond all indicators, in fact, and into the actual structure of the market itself. A trader once wrote, "If the indicator hadn't been placed on the charts, would the market still have turned where it did?" If one is able to concede that the answer to that question is, "yes", then the next question should be, "Why?"
  • #202
  • Feb 19, 2016 4:48am Feb 19, 2016 4:48am
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What can I say, the market appears to be bouncing off fib levels......
  • #203
  • Feb 19, 2016 4:57am Feb 19, 2016 4:57am
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I marked all the areas of interest that are either nowhere near the fib or miss it
Price-Action Extremist
  • #204
  • Feb 19, 2016 5:03am Feb 19, 2016 5:03am
Quoting bagman
{quote} Your perception is fooling you. Would you still see interesting things exactly at 61.8 when you did not know about fibo retracement? {image} Take a look at the fibo screenshot again I posted 2 pages before. Take a close look at the distance between the 50 and 61.8 line. I cooked it. I took a screenshot from babypips.com, then cooked the screenshot and moved the 61.8 line up to 64. Now with that information you can clearly see that the 61.8 line is way too far above the 50 line. But no one here noticed it before. Selective perception. If...
This is the major flaw in your thinking about Fibs. You are looking at only half the function of the Fib Tool.
This is where I was also thinking the same way as you in the past, Fibs are useless, redundant, No logic, hindsight etc. etc.

When a boxer throws a punch, the arm is pulled back, ( that is not the punch ), then when the arm extends out the punch is then complete.
How do you anticipate the strength of the punch ? What is the difference between a Jab and a Knockout blow ?

The classic ABCD PATTERN occurs in the charts more often than randomness would suggest, exploit patterns that repeat.
It never gets easier, you just get better
  • #205
  • Feb 19, 2016 5:04am Feb 19, 2016 5:04am
Quoting bagman
{image} I marked all the areas of interest that are either nowhere near the fib or miss it
OK - point made!

I guess we'll have to agree to disagree on this one.
  • #206
  • Feb 19, 2016 5:07am Feb 19, 2016 5:07am
Quoting simond2002
{quote} I want to address this final point because in my view, it's the single most important one. It's a semantic debate but believe me, you really should consider dismissing the use of the word "predictive" in your trading vocabulary. There's nothing "predictive" in retail trading, nor should there ever be, until a trader actually enters the market. Then and only then can the word "predict" be used, in as much as the trader "predicts" with a degree of probability that his trade will either go to target or take him out for a controlled loss. This...
I am very sure about it. Everything every single trader wants is to get more money out than he throws at the market. And for that we use indicators and charts and drawings and the sole purpose of all that is to predict where the price goes next. If we are right more often or have a high reward ratio, then we statistically have a high accuracy in predicting prices.

People should stop this "we are unworthy" and get all humble when talking about prediction. Yes predicting where the price goes is possible with some accuracy. And everyone's account balance is statistical proof of the ability to do that (along with their ability to manage risk). If you got an account with increasing moolah, means you are predicting price with an accuracy high enough to acquire moolah.
Price-Action Extremist
  • #207
  • Feb 19, 2016 5:19am Feb 19, 2016 5:19am
Quoting bagman
People should stop this "we are unworthy" and get all humble when talking about prediction.
I didn't see anybody stating that but yeah, like you allude, at the end of the day it's all down to the equity curve - money talks, bullshit walks, as the saying goes.
  • #208
  • Feb 19, 2016 5:23am Feb 19, 2016 5:23am
Quoting Shabs19
{quote} This is the major flaw in your thinking about Fibs. You are looking at only half the function of the Fib Tool. This is where I was also thinking the same way as you in the past, Fibs are useless, redundant, No logic, hindsight etc. etc. When a boxer throws a punch, the arm is pulled back, ( that is not the punch ), then when the arm extends out the punch is then complete. How do you anticipate the strength of the punch ? What is the difference between a Jab and a Knockout blow ? The classic ABCD PATTERN occurs in the charts more often than...
For fibs to be accurate one would have to run a test on many thousand charts and see if retracements or special zones are forming exactly on those points and ratios.

50 does not count because that is just the gemoetrical center of something. no golden ratio magic. Same for any ratio that would result in symmetrical patterns like 20 40 60 80, because that is just symmetry. It would have to stack very much precisely on 38.2 and 61.8 with a tiny margin of variance of 1.0 in either direction and no where else near to prove golden ratio magic. But all arguments for fibs I have seen are increasing the variance so much until it fits. That is selective perception. The reason for that is because fibos are a pattern that appears in a tiny fraction of natural patterns and because people like all animals have the ability to scan for patterns. That is mixed with the belief that nature is hiding secret messages for us to uncover. Now there is nothing wrong with looking for patterns, but we are naturally inclined to cherry pick the patterns we want to see and skip those we do not want to see or subconsciously filter out. In science there are mechanisms to get around this flaw in our perception or emotions. In medicine test of drugs they use double blind methods to prevent people from intentionally or unintentionally skew results. In math there is probabilty which can predict things with great accuracy, and test if something actually have a high predictive quality. Insurance math for example can predict very accurately how often car crashes occur within a certain time in an area. The ability to predict that and the quality of the prediction is the reason why insurance companies exist.
Price-Action Extremist
  • #209
  • Feb 19, 2016 5:48am Feb 19, 2016 5:48am
http://www.followingthetrend.com/201...professionals/

Quote
Fibonacci numbers are for the mathematically challenged. Sure, you can go ahead and flame me now. I’ll wait.
With a little creativity you can fit anything you want to a Fibonacci retracement, projection etc. The apparent precision that the decimals imply is just another layer of the illusion. Instead of saying that sometimes prices move back by around a third, this silly back story would have you believe that the prices should move exactly 38.1966%. I wonder if you’re supposed to use this on price series or total return series? How exactly should...

http://www.forbes.com/sites/rickferr.../#172205a92e41

Quote
Hoffmann and Shefrin found the investors using technical analysis had lower performance, on average, approximately 50 basis points (0.5%) per month in raw returns from portfolio selection decisions and 20 basis points (0.2%) from additional transaction costs. Adding these together, the marginal cost in investor returns due to technical trading was 70 basis points per month — approximately 8.4% per year.


Quote
Buffett reportedly joked about this dilemma with an audience at Vanderbilt University in 2005, “I realized that technical analysis didn’t work when I turned the chart upside down and didn’t get a different answer.”
But what does he know right?


http://papers.ssrn.com/sol3/papers.c...act_id=2401230
An interesting read.

Quote
Our study shows that additionally technical analysis dramatically accentuates the poor average performance of high derivative rollers by -130 basis points.
Wealth comes from what you keep, not what you earn
  • #210
  • Feb 19, 2016 5:49am Feb 19, 2016 5:49am
Quoting bagman
{quote} In math there is probabilty which can predict things with great accuracy, and test if something actually have a high predictive quality.
Ultimately it is all about probability of the optimum place to enter & to exit a trade. Fibonacci is not precision it is probability.
Does it work every single time on the exact number ?
Does any indicator give you an entry on an exact number ?
Does every chart with every broker look exactly the same ?
Will 2 traders enter & exit trades at the exactly the same price using the same indicator ?
Don't think in terms of precision, this is not that kind of a business, it is like insurance business in many ways,
sometimes you win, sometimes you lose, overall long term your stats should produce a profit.
It can be predictable & unprecise at the same time.
Like you say, ultimately it is all about being profitable long term.
It never gets easier, you just get better
  • #211
  • Feb 19, 2016 5:52am Feb 19, 2016 5:52am
Quoting Shabs19
{quote} Ultimately it is all about probability of the optimum place to enter & to exit a trade. Fibonacci is not precision it is probability. Does it work every single time on the exact number ? Does any indicator give you an entry on an exact number ? Does every chart with every broker look exactly the same ? Will 2 traders enter & exit trades at the exactly the same price using the same indicator ? Don't think in terms of precision, this is not that kind of a business, it is like insurance business in many ways, sometimes you win, sometimes you...
If someone claims fibs work because they show interesting things on 61.8 but then the charts are all over the place 20 points above and below that then he did not prove fibs work.

fibs only get so much credibility because of the supposed magic nature patterns in it. Nature does not want things, nature is chaos. If you look at lions and zebras you might feel like singing circle of life by elton john and how beautiful and balanced the system is. But it is not unless you are a lion. The only reason lions and zebras appear to live in a state of balance is because both systems by pure dumb luck (because that is what natural selection is), manage to exist. Zebras breed in large enough numbers and lions in low enough numbers so that lions can't eat the entire zebra population. Of course all the creatures or subspecies than lions might have driven extinct before are filtered by selective perception. Therefore there is no secret fib patterns trying to tell you how what the chart will do
Price-Action Extremist
  • #212
  • Feb 19, 2016 6:11am Feb 19, 2016 6:11am
Quoting bagman
{quote} If someone claims fibs work because they show interesting things on 61.8 but then the charts are all over the place 20 points above and below that then he did not prove fibs work. fibs only get so much credibility because of the supposed magic nature patterns in it. Nature does not want things, nature is chaos. If you look at lions and zebras you might feel like singing circle of life by elton john and how beautiful and balanced the system is. But it is not unless you are a lion. The only reason lions and zebras appear to live in a state...
Fibs is only one part of the picture. Market structure is important as well. Knowing how to use them together is key.
I use Fibs in an unconventional way, the numbers are not different, but more zones than lines.
Fibonacci is used widely in TA, is it compulsory ? - No
Would it help you if you knew where Fib traders are likely to enter / exit the market ?
Can you locate on your chart where a large order is likely to be placed by institutions ?
A Lion will not hunt alone, and it will always go for the easiest kill. It only hunts when there is a need to.
It never gets easier, you just get better
  • #213
  • Feb 19, 2016 6:36am Feb 19, 2016 6:36am
Logic behind fibs is human psychology that drives price action. That's why Elliot waves often work, the same logic is behind fibs. First impulse wave is started by some global fundamental news or some deep pocket bank trader who needs to fill huge order(s) for his client(s). After first impulse wave is exhausted, we see corrective wave which often stops near or at Fib ret levels. Why? Because large speculators are waiting to come in at better price and they have to use some kind of measure where price is cheap enough to come in. If they don't have access to large portion of direct order flows, TA is the second best thing to assess where price might reverse. New "impulse" orders have to fight remaining "corrective" orders, so price often consolidates around these supply/demand zones, before "corrective" orders lose battle and price action starts new impulse wave. That is why fib retracement levels shouldn't be considered as exact horizontal lines but rather as zones where battle between bulls and bears is taking place and a good place to watch who will come out victourious.

If we take a look at present gold price action:

After a strong uptrend, price retraced and pierced 78,6 % fib level and round number 1200, but found support at 200 SMA (1H).
As you can see price then consolitated in what apears to be symetrical triangle - demand zone (battle between bulls and bears) roughly between 61,8 and 78,6 % fib,
broke to the upside and continued its uptrend. After pattern target was reached, price retraced again and found support exactly at 50 % "fib" level. Now we'll see if price can push to 1264 level again (recent market top and almost exactly 161,8 % ext. fib target level).
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  • #214
  • Feb 19, 2016 7:07am Feb 19, 2016 7:07am
So, I saw the CAD chart, and although I don't trade the CAD, some of the guys in my trading group do trade it and some of the crosses. They have been trading the retrace of a previous down move, with targets of the .382 and then the half way point, which of course, if not a fib number. As you can see on the chart, the recent PA was making poles and not pullback as it moved first to a -1.27 extension, then on up to the .5 level. A couple of things to think about: the market is not moving to and from fib levels, and instead, the fib levels are just showing what the banks are doing, and as long as they continue to do what they are doing, so will my trading friends; and second, these levels are not meant to be exact or "accurate", rather they represent the processes and procedures being executed by thousands of traders all over the world, so accuracy is certainly not part of the formula. I have been trading GBPJPY and EURJPY since last night, using a similar approach to this chart (not on the 5M chart, but trading the structure on multiple charts). But, this is just one level of analysis that we use, and it is helpful, even if not the entire TA being used. I think this chart addresses most of the circles that some where wondering about.
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  • #215
  • Feb 19, 2016 7:28am Feb 19, 2016 7:28am
Quoting magnumfreak
draw enough lines on a chart and eventually you will find that price will "respect" at least one of those lines all the while we fail to mention the other 7 that it just passed through on the way to the one that "worked". It is like all things we put on our charts in that it is there to provide you with a way of justifying your actions as to why you bought or sold at a particular point. As with all trading methods, some will profess its absolute perfection while others will decree its absolute nonsense. Who is right and who is wrong? Who cares?...
This is the answer. Whenever someone asks a question like this you'll get a lot of personal bias, "I think", "My experience is" etc. The problem is, that's not science. It doesn't represent the broader truth about the quality of an approach. To my knowledge there has never been serious research done on Fib, Gann etc with regards to trading. I think a lot of that has to do with the fact that it's difficult to build testable rules, a lot of the implementation is interpretation, which is true of all technical analysis (my own included). Stuff like this makes for great guru books, and if it helps you or gives you structure that's fine, but we should never assume that broad implementation or agreement on an unproven approach is an actual vote of success. Really the opposite.

We know 70% of all traders lose money every quarter, if we're assuming that the vast majority of them are using Technical Analysis, Chart Patterns, Price Action and so on, then by those statistics most of this stuff is garbage.
When you hit 50, coffee becomes part of a proper modeling pipeline.
  • #216
  • Feb 19, 2016 7:36am Feb 19, 2016 7:36am
Quoting GEfx
{quote} Must you? What the hell are you talking about? What did I say to lead you to such a conclusion?
Simple logic (in addition to the fact that fibs have no positive statistical significance)

Retail forex trader lose money
Retail forex trader love to use fibs
"professional" forex traders use fibs

Therefore "professional" forex traders must be losing money.
  • #217
  • Feb 19, 2016 7:45am Feb 19, 2016 7:45am
Quoting Mingary
{quote} Simple logic (in addition to the fact that fibs have no positive statistical significance) Retail forex trader lose money Retail forex trader love to use fibs "professional" forex traders use fibs Therefore "professional" forex traders must be losing money.
This is probably very close to true. The average annual return of CTA's who report to the Barclay's Currency Index was just over 2% for the last ten years. Not exactly enough for the average retail trader to live of off.
When you hit 50, coffee becomes part of a proper modeling pipeline.
  • #218
  • Feb 19, 2016 7:55am Feb 19, 2016 7:55am
100 traders - 100 different opinions; all of them right!

The only people making real money are the brokers.
  • #219
  • Feb 19, 2016 8:02am Feb 19, 2016 8:02am
Quoting boxferret
100 traders - 100 different opinions; all of them right!
From FF homepage

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  • #220
  • Feb 19, 2016 8:04am Feb 19, 2016 8:04am
Quoting TheFxAnalyst
We know 70% of all traders lose money every quarter, if we're assuming that the vast majority of them are using Technical Analysis, Chart Patterns, Price Action and so on, then by those statistics most of this stuff is garbage.
I agreed with pretty much everything you said until I read the last bit, which I would respectfully disagree. I do not believe that experienced price-action traders make up part of your 70%.
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