An Intro to Fibonacci Trading Strategies
Fibonacci was NOT a Forex trader and the idea of applying, this strategy to trade currencies is based on flawed logic, as we have seen above. In the next video tutorial we will look at the strategy of trading Fibonacci retracements in more detail and some back testing, we did on the popular retracement levels against random numbers - were they more successful than picking just a Fibonacci levels, let's find out?
Trading Fibonacci Retracements How Profitable Are They?
Why Fibonacci Strategies are SCAMS
As you can gather from the above videos, we are not big fans of trading Fibonacci trading strategies! We think the idea of trading retracements is a sure fire way to lose money trading currencies and this is not just our opinion – it's based on facts.
Below, you will find the most frequently used Fibonacci retracement levels:
23.6%, 38.2%, and 61.8%
You can skew the number slightly from the accepted retracement levels and see how they perform. We did it by 5% and in some of our testing, our random number did better! So we beat what is supposed to be Universal Law! We didn't even put any thought into it, we just devised our random number sequence and made it a trading strategy, after having a few drinks in the office and we beat what is one of the most popular strategies in Forex.
The Golden Ratio and a Great Way to Lose Your Money
The level which is supposed to be the best is 61.8% - why?
Well apparently, this is because 1.618 refers to the Golden Ratio or Golden Mean which is also referred to as Phi. The inverse of 1.618 is .618. So this makes 61.8% special and the logic this is based on is the following:
The ratio can be found throughout the natural world - in spiral galaxies, fruit, animals art and biology - sounds impressive? Well this is nature not a trading market but many people think, that this ratio is important in trading and here is one quote that illustrates the point :
“The proportion of .618034 to 1 is the mathematical basis for the shape of playing cards and the Parthenon, sunflowers and snail shells, Greek vases and the spiral galaxies of outer space. The Greeks based much of their art and architecture upon this proportion. They called it the golden mean” (Robert Prechter quoting William Hoffer from Smithsonian Magazine)
So what has the above got to do with trading markets? NOTHING - At all:
Forex markets don't move to science – humans do not conform to any universal law and no static number is any help at all in predicting where price turns might happen. However to Fibonacci devotees it's a Law and works! So if markets are scientific, Fibonacci trading methods should work each and every time which is what scientific laws do but does Fibonacci? Of course it doesn't so why not?
Because, as you will have guessed from the sarcastic tone of this article, it should be obvious to anyone, that currency markets are moved by humans and humans, are totally unpredictable and they do not obey any laws – they move markets on greed and fear.
Its amazing how many people think Fibonacci trading techniques can make money and treat them seriously – here is a quote, from a chart service I really like but it's missing the whole point, of how a scientific strategy should work. Read this quote and you will see how stupid the theory is:
“Fibonacci retracements are often used to identify the end of a correction or a counter-trend bounce. Corrections and counter-trend bounces often retrace a portion of the prior move. While short 23.6% retracements do occur, the 38.2-61.8% covers the more possibilities (with 50% in the middle). This zone may seem big, but it is just a reversal alert zone. Other technical signals are needed to confirm a reversal. Reversals can be confirmed with candlesticks, Momentum indicators volume or chart patterns. In fact, the more confirming factors the more robust the signal” (Stockcharts.com)
So if it works on science and universal law – why all the subjective view of it and need to use confirming indicators?
The above shows it's not a scientific and universal law. Fibonacci theory is just a dumb strategy which traders love, because its a bit mystical and appeals to the idea, you can predict the future and make easy Forex profits. The problem though is Forex markets are brutal, unpredictable and traders, should ignore this trading strategy and get one based around trading the odds.
Final Words on Fibonacci Trading Systems...
I find it odd that trading Fibonacci retracements is so popular the logic is wrong and I think even Leonardo Fibonacci would agree with me if of course, he was alive today but of course he I dead for thousands of years , never traded Forex and would have no interest ( in my view) that his number sequence is being used for a purpose it was never intended. Always keep in mind:
95% of Forex traders lose – 5% win and how many use Fibonacci retracements in their trading strategies or systems – none. Don't fall for the hype and easy money message of - trading Fibonacci numbers for profit - its a trading strategy for losers – period.