Automated Fibonacci Trading Is A Dead End

I tried to make an automated Fibonacci trading strategy once, and it didn't work.

I discovered that Fibonacci retracement levels are akin to Santa Claus, the Toothy Fairy, and the Holy Grail.

They are only figments of your imagination and nothing more than random chance.

Fibonacci retracements are completely bunk, and I'll demonstrate why.

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Automated Fibonacci Trading Is Not a Magic Money Machine

For some bizarre reason, Fibonacci (“Fib”) numbers have taken root in people's minds across the globe.

But guess what: automated Fibonacci trading won’t provide you with a magic money-making solution or lead you to Nirvana. 

How do I know?                                                                                     

Simple: unlike a lot of folks out there, I tested it, again and again.

When it comes to trading, do NOT let Fibonacci retracement levels serve as the basis for your decisions.

There is simply no place for such psychological comfort in the trading world.

But I'll confess, for a while I thought there might be something in them, since, as I’ve already demonstrated, the S&P 500 likes to mean revert.

Buying pullbacks – a decline in price – is very profitable.

Buy where do you want to buy when a market starts to decline?

Fibonacci followers say to buy pullbacks at the 23.6%, 38.2%, 50% 61.8% and 78.6% areas.

Automated Fibonacci Trading: There Are No Magic Solutions

Even if prices don’t reverse exactly at one of them, a believer will still fool themselves into believing there was a Fibonacci number at work.

Why?

Because deep down these people feel there's a magic solution at hand.

But there are NO magic solutions.

Never were, never will.

Fibonacci ratios are created by us, mere mortals, in our vain attempts to dispel uncertainty about the natural world.

Let the Computer Do The Work, Not Fibonacci Retracements

Say I kick a football and it landed at the fifty-yard line.

Does that mean a Fibonacci number was at play?

Or is it just random chance?

To prove that Fibonacci level do not work, I wrote up an automated Fibonacci trading program to look for the best "retracements" to buy intra-day on the S&P 500.

I let the computer tell me which levels are best to buy, not the predefined "Fib levels".

And guess what, I didn’t get a Fibonacci ratio.

In fact, what the computer told me was that around the 23.6 – 38.2% pull back area intra-day was the best place to make a long day trade if the market is already moving higher:

Automated Fibonacci Trading System

The computer would then buy in that area using a limit order and set a target and stop loss, so the potential risk and reward are exactly the same.

Here were the results of the Automated Fibonacci trading strategy:

Automated Fibonacci Trading Day Trading System

Non-Fibonacci Day Trading System

As far as I’m concerned, the only edge people are utilizing when buying Fibonacci retracements is that stocks like to mean revert most of the time - and they are just getting lucky.

But I don't want luck to have anything to do with my trading what-so-ever.

I want cold, hard scientific proof there is an edge to exploit before I risk a dime - and I suggest you demand the same.

Your account will thank you!

Conclusion: Automated Fibonacci Trading Does Not Work

  • Fibonacci level are just a mirage from the basic principle that the stock market mean reverts
  • Fibonacci numbers are another great example of pareidolia at work
  • Beware the Automated Fibonacci trading strategy quackery!

About the Author

Hello! I'm Kurt the "Relaxed Trader" writing the stuff on this website. Feel free to ask me questions. I love talking to fellow traders that want to use computers to beat the stock market. Shoot me an email: Kurt@relaxedtrader.com

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