Do Fibonacci Systems Really Work?
February 1, 2011 by Celebration
Filed under Web News
We can begin with the Fibonacci numbers. The ratio used to compute this set of numbers is 1.618 and it stays invariant throughout the sequence. Originally discovered through work by mathematician Leonardo Fibonacci in the thirteenth century, the Fibonacci sequence popularity has increased greatly in day trading. Teh real question is whether they work, and why do they work. Any e-mini day trader who has traded Fibonacci numbers comes to realize that the market frequently pauses, sometimes turns, and occasionally pushes straight through the sequence of Fibonacci retracements. There is no denying the numbers are relevant, and traders pay attention to them .
In my opinion that Fibonacci numbers work with enough accuracy to take notice , but the the exact mechanism by which they work is because of the large number day traders incorporate the system. When the market makes a move from trough to peak, most technical traders will immediately draw in the Fibonacci retracements to the length move, and therefore the system becomes a self fulfilling prophecy. And that’s okay with me . Many true Fibonacci traders take offense to this account , and go to great lengths to explain that there is relevance in the ratio. Maybe there is, but I’m not a believer in that explanation. As a chaos theory adherent, I feel the only scientifically provable explanation is the self-fulfilling prophecy argument. The Fibonacci adherants point to ancient engineering and a plethora of natural phenomena that use the Fibonacci sequence. There is nothing to argue on that account , a large number of ancient architects and natural occurring phenomena adhere to the formulaic boundries of the Fibonacci sequence in their respective fields, but I cannot connect the dots . Which is to say, “yes there are Fibonacci numbers all about, but what does that have to do with investing?” The answer is a raucous response to the question… “nothing at all.”
As a day trader, my goal is to take successful trades. Whether the Fibonacci sequence is scientifically verifiable is of no important to me, as I am only concerned with profitable trades. I cannot recommend using only Fibonacci ratios in your trading. However, I always draw in the retracements after a significant market move, up or down. You would be amazed how often the market honors them, too. I frequently like to trade the Fibonacci when it has already stopped and retraced on a particular number, as this establishes real authenticity for this point on the chart. Then I can initiate trades grounded in this information , based on the parameters the Fibonacci has imparted.
So there you have it , but the reason the Fibonacci ratios work is poorly understood , and I am unable to bestow mythic credibility based on the history of the ratio. On the other hand, there is no denying the market pays attention to these numbers. Whether I believe they are a self-fulfilling prophecy is of no importance , because as traders we only deal in profitable trades and growing account balances. The “why” just doesn’t matter. You can find several articles on this topic at the E-mini Trading Professor site.
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