For years, I’ve listened to traders spout off about Fibonacci trading.
Fibonacci retracement level are akin to Santa Claus, the Toothy Fairy, and the trader’s "Holy Grail".
They are complete bunk and I'll demonstrate why.
Fibonacci Trading Is Not a Magic Money Machine
For some bizarre reason, Fibonacci (“Fib”) numbers have taken root in trader's minds across the globe.
But guess what: 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.
Buying pullbacks – a decline in price – is very profitable.
Buy where do you want to buy when a market starts to decline?
Fibonacci traders say to buy pullbacks at the 23.6%, 38.2%, 50% 61.8% and 78.6% areas.
There Are No Magic Solutions
Even if prices don’t reverse exactly at one of them, a Fibonacci trader will still fool themselves into believing it was a Fib number at work.
Because deep down these traders feel that a magic solution is at hand.
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 trading did not work, I wrote up a program to look for the best "retracement" levels 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:
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:
As far as I’m concerned, the only edge Fibonacci traders are utilizing when buying Fibonacci retracements is that stock indexes like to mean revert most of the time - and they are just getting lucky some of the time.
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: Fibonacci Trading Does Not Work
- Fibonacci trading is just a mirage from the basic principle that the stock market chops around
- Fibonacci levels are another great example of pareidolia at work
- Beware the Fibonacci "technical analysis" quackery