Hello traders!
Here is a new video, on the back of the one earlier today about moving averages,
trying to address the topic of using Fibonacci retracement levels to find an entry
and a target for your trades.
As always, let me know if you found this useful, wishy-washy, intelligible, nonsense, etc.
(I can take criticism, throw anything you want) 
Since no one has left a comment yet I suppose I will! I watched it on x2 speed so there may have been something I missed, but there was a comment you made that really stood out to me. It was something along the lines of:
āSome people say itās just coincidence. You can do statistical studies that demonstrate that these (fib levels) are just random lines, and price will at some point match some of themā¦ [I]Itās up to you but the point is that you can use these to set your targets[/I]ā
This statement came off as interesting to me because IF fibs are just a bunch of hocus pocus, then why would you use them to set your targets? I feel like in that scenario you would do just as well picking other random numbers than using fib numbers. It seems that if one is to use fib levels as entry/exit points, that it would be necessary to first, believe that fib levels work and secondly, be able to consistently profit off of them OR prove that they work better than other random levels OR etc.
Thoughts? Do you use fibs? why/why not?
So nice to.get feedback!
Well, my comment came because I remembered reading this from my esteemed fellow forum user, Lexys:
http://forums.babypips.com/free-forex-trading-systems/74960-fibonacci-works-i-can-show.html
In a way, I was quoting her thoughts out of contextā¦apologies.
I no longer use Fibs but when I did they worked within what system I hadā¦ It is not to say I could not turn to them again
What do you think about Fibonacci levels?
Thanks for the link. I havenāt read the book (although I am familiar with the author) so I wonāt speak much on the topic.
Personally I have never seen fib levels in a statistical background outperform 50-50 lines, so that may be a case where I havenāt properly completed my homework. Lexyās post suggests to me that fibs donāt actually perform that well, although given how one defines the word ārandomā I suppose it could go either way.
If they work for your system, thatās truly remarkable. Iāve never had success with them so I look forward to perhaps learning more about them from you.
Hello LiquidGenius!
I was going to make a video about this, but I decided to just show one example on here instead;
this is a screenshot of EUR/USD that I prepared just minutes ago:
The daily chart shows various levels in different colours, representing round-number levels at 500-pip
intervals (from the 1.40 top down to 1.35, then to 1.30, to 1.25, and so on); the dashed black lines are
the Fibonacci levels and the red diagonal line is the Fibonacci trend-line tracing the down-move from the
1.40 top (May 2014) to the 1.05 bottom (March 2015).
What you can see here is that the gap between some of the Fib. levels (as, for example, between the
0.61 and the 0.76 levels) is also a 500-pip one, but there is never an overlap with those round-number
(coloured) levels.
This is interesting because it shows two things:
while round numbers and Fib. levels can be used in parallel, they may not coincide;
the gap between Fib. levels is not the same between all of them;
round-number (or other) levels stay true in time, whereas Fib. levels have to be readjusted to trend.
What is obvious, also, is that price interacts visibly (at least in my example here) both with those
round-number levels and the Fib. levels, sometimes interacting more with one than the other, without
much clarity: this may leave us to draw our own conclusion, but it is clear that both sets of levels
are usable as trading signals, and that in the end it is all about risk management (as there is no
price level that can be either support or resistance for ever - things break, especially price levels)ā¦
I hope that I managed to explain the situation a little better.
Hi PipMeHappy,
Iād like to up the level of the discussion here if you would be so inclined, and delve deeper into what you mean by the statement above.
First: āprice interacts visibly (at least in my example here) both with those round-number levels and the Fib. levelsā. Ignoring round numbers, which are identical on every chart, I want to explore this level of 'price interacting with x"
Below is a picture of an indicator that paints lines that are drawn once at the beginning of the day. A sort of tuned pivot indicator if you would, with only 1 set of levels above/below open price. Does it seem to you that price interacts visibly with this indicator?
My argument isā¦ sure! There are actually some pretty good points to make for it.
ābut it is clear that both sets of levels are usable as trading signalsā
Keeping in mind the chart and the points I laid out, do you think that the levels drawn by this indicator are also usable as trading signals?
Secondly: " in the end it is all about risk management (as there is no price level that can be either support or resistance for ever - things break, especially price levels)"
If this statement is correct (it is all about risk management), then I suppose we can drop the above exercise and focus on this as it is the heart of the issue. I understand basic math, but I have seen this phrase āIt is all about risk managementā and I have forever failed to understand what it means. In other words, I know that if you have a position that is a 1:1 risk:reward, you need to win at least 50% of your trades to gain positive equity over time. Further, for any risk to reward where risk is normalized to 1, you need to win at least 1/(1+reward). This much I understand. What I donāt understand, and maybe you can clear this up now or in another video (perhaps an older video?) is how your risk management makes you money if your entry and exit system has no edge. And by no edge, I mean an edge that is not significantly different than a modded pivot indicator, or at worst, randomly drawn lines. To me, there is no use, and no difference, between using a 1:1 risk:reward, and a 1:2 risk reward, if your win rate is 50% in the first and 33% in the second (or lower). How does ārisk managementā create a higher win rate?
Good questions!
I am not the source of all knowledge (who is?), so while I will attempt an answer to your points, I hope that others will come forward and join in the debateā¦
Yes, the screenshot that you presented reminds me of Bollinger Bandsā¦ which has a similar price-to-indicator interactionā¦ The problem with all of these indicators is that they are lagging, and our projections into the future are always a matter of probability moving into the unknown. Trading signals can be expiscated from price through technical analysis, and price-based indicators can help us mapping out patterns based on statistical models. From this point of view, any interaction of price with indicators or of levels chosen by us (as significant to that instrument) can be valid if we ourselves validate it not only through our analysis but through our own trading: the more successfully we identify levels of supply and demand, the more of an edge we will have in positioning on the right side of market moves: that is all we want, of course, but we will be wrong, many times, regardless of experience, indicator, or strategy.
This is a very good question, and it comes down to this: how much are we willing to lose? Bearing in mind the scope of this question, which encompasses so many trading styles, it is a particularly difficult and elusive answer which could fit all traders in all situations. For example, an āedgeā defined as surpassing the annual performance of the S&P500 may suit some longer-term traders, where shorter-term traders would not be satisfied with that. Without fudging the issue of āedgeā, it is important that we treat the topic individually, because the general idea of āprofits outsizing lossesā is simple but its application is incredibly complex.
I am therefore unable to give one answer to this, and I would have to embark on some extensive research to feel even ready to at least boil down the issue to what āedgeā means, in practice, for an individual retail trader working with leverage through a volatile market environment, whether short-term or long-term. As one who is more and more preoccupied with long-term trading, I look further out than a daily landscape of pivots/levels, although they are of value in certain moments; it would perhaps be an intra-day trader who would like to really push their analytical view in order to answer your point.
How do you trade?
That is the nice and helpful conversation thanks everyone post those helpful information.
best regards
sonwiliam
Perhaps āRisk managementā is the trouble phrase here and Iād like to know your definition of it. To me, risk management simply means how much money (percentage of oneās trading account) is at [I]risk[/I] when a trade is initiated. That is, if the trade is lost, how much is lost? Anything in the realm of moving stops or profit levels is what I consider trade management, and is (should be) pre-determined by the trade structure and pre/current trade analysis.
Also, I suppose the word āedgeā should be defined as well: I view it as knowledge over the market that exists in such a way that it significantly (and statistically) differs then how one would expect to see in a random or proportional market. I guess I am more than happy to adopt different definitions for the sake of this thread.
If the indicator in the screen shot is lagging then Iām afraid fibs do no better; both of them take past price to create future projections of where price may head.
Correct. I have never been able to analyze fibs in a way that they āvalidateā a setup, trade, or outcome, hence why Iām am curious to learn more about how you have done it.
As for your response to the second part of my post, I think you may have misunderstood me, so I will try it again.
You stated:
Because of the āandā operator, it would be unjust to dissect just one part of your argument. Iāll start with the first part, concerning the levels and their ability to be used as trading signals.
Iām curious to learn more about and know why it is that fib levels, which as I showed above, [B]seem to[/B], at a glance have no edge over other indicators, such as the pivot indicator used in the example. I put emphasis on āseem toā because I am quite certain that there is no edge in the pivot indicator. If fib levels have an edge and there [B]must[/B] be if you use them and profit from them as you state here:
then where is this difference? That is the heart of the question because the video topic is: āhow to use fibs to set targetsā. If the pivot levels shown have no edge (analysis done by me), but fib levels do (analysis done by you), both in the context of setting targets, where is this edge?
As for the second part, āit is all about risk managementā, I still struggle to understand why answering the question āHow much are we willing to lose?ā has an effect on win rate , or for all practical practices, true R:R. Yes a long term trader or position trader may only be willing to risk .5% or 1% of equity on a trade whereas a speculator would be ok to risk 2 or 3%, but this is simply multiplication, and R:R for a 1% risk trade to a 3% risk trade just multiplies the reward by 3. Determining how much one puts at risk does not change the outcome of the trade.
Iām a breakout trader.
Simply put? I agree entirely with your definition of itā¦
At the risk of being accused of sycophancy, I once again agree with your definitionā¦
Correct!
There is no edge in using Fibs, just as there is no edge in any indicator or system if it loses you money or you are unable to use it to its full potential; I used them in the past, and they worked in allowing me to set targetsā¦ It just happened that I chose them over so many other indicatorsā¦ The reason why I no longer use them is that I have changed my trading style, not because of Fibs failing me in some wayā¦ Sorry if I was unclear about this.
Part of my making a basic video was to touch on a topic without going into a lot of depth, which of course throws up a lot of questions: why making a video in the first place? Forum members made some suggestions, so I listened and I tried to answer some of their questionsā¦ The choice of talking about Fibs was partly because I used them before and understand them reasonably wellā¦ Like anyone making videos, one always (inevitably) ends up being influenced by oneās style of trading, oneās own psychology and money management considerations, and oneās own subjective analysis of the marketā¦
I am sorry to (perhaps) disappoint you a little by, once again, agreeing with you!
Great stuff! Thanks for sharing!
A stimulating discussionā¦
My interest was in the (potential) edge in using fibs are target levels. If you used them and think that there are none then I have no more questionsā¦
I hear youā¦
