Fibonaci levels

Hi all,

I have a few questions regarding fibs that hopefully you can help me with.

Firstly, Why are fibs levels important in trading. Ie why are they likely to act as support or resistance or entry signals? Is there anything about these levels themselves or is this just because so many people use them thus causing a self fulfilling prophecy?

Secondly when drawing the fib level tool on charts where should you draw from? Is it the most recent max or min or from previous max mins? What time frame? Does everyone do this the same way? I hear people talking about price hitting certain fib levels like its common knowledge but if everyone is setting them up differently then these are just nonsense statements.

Thanks

Kev

I use fibs quite a lot when trading. I always draw them from the recent swing high/low and this will obviosuly be different on each time frame you look at. I generally look at W1, D1, H4 sometimes H1, so i may have 1 or 2 fibs up at anytime. I really only find them helpful when they line up with other support/resistence areas or when I am looking for take profit/stop levels.
I think the reason they work is like you said, becasue so many people use them. Obvisouly people will draw them differently but i think it you just use the most clear swing high/low then you wont go to far wrong.

Hi!

Well, firstly, the Fibonacci series/sequence is closely related to the Golden Ratio phi ( 1.618… ) [ the Fibonacci sequence converges to the golden ratio ]. The sequence/ratios are observed in nature and the symmetry they provide are applied in numerous fields (science, engineering, art, and also financial trading).

Since trading is a human endeavour (human beings move the market, whether fronted as a bank or government), naturally occurring patterns ( e.g fibonacci ratios ) start to show up. And that primarily (and very very briefly) is where their importance lies.

As if that were not enough!, as you have mentioned: given the prevalence and belief in the use of the Fibonacci sequence numbers in trading, they end up being a self-fulfilled prophecy. So even if all that stuff about them being naturally occurring and being tight with phi wasn’t true, they still have an effect because enough eyes are watching those levels! [ which is actually just the basis behind support and resistance -> that repeatable levels occur in the markets because enough eyes are watching those same levels because they were important in the past because many eyes were watching those levels because they were important in the past because… ]

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I learned from BabyPips School that Fibs are drawn from the most recent swing high/low to the current swing high/low. (whichever the timeframe). If price is moving upwards: draw from swing low to swing high; if price is moving downwards, draw from swing high to swing low.

Do all people draw them that way? Probably not, but what counts is whether the people who move the markets ( governments,banks ) draw them that way. But I believe that’s the correct method of application, it’s served me well too.

I agree with Sheppard on the point that Fibs are helpful as support tools, and are most ‘powerful’ when they line up with established support/resistance areas. I know there are many (working) methods that use Fibs as the only determinant for entries/exits/SL, and that’s all good.

I personally prefer to view them as a tool for determining confluence (the coming together of important variables surrounding a trade area useful in making a decision about a trade). For me, horizontal S/R levels come first; the Fibs are for additional ‘confirmation’ that others may be watching the same level(s).

Safe trading!

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E.g:

=> Fibs drawn on D1:


=> PA signal (BEEB) seen on H4 at 50 Fib


Thanks guys,

Thats some really good answers. Much appreciated.