Therefore they should be important in financial markets as well. Fibonacci ratios are often observed in the nature.These are the two main explanations offered by various technical analysts: We ignore the multitude of cases where the rule doesn’t hold. With any charting technique, there’s a human tendency to look at the chart and only see cases where the rule holds. In addition, I found no strong philosophy on why these levels should be so important in global financial markets. There are some indications that the concept was developed after the invention of Elliott Wave Theory in 1930s. It is not clear who first applied Fibonacci levels to financial trading. Technical traders consider these to be “zones” where reversals are more likely to occur. The solid blue lines mark the Fibonacci distances. An example of working Fibonacci retracement © forexop The chart in Figure 1 shows how Fibonacci retracement works during a typical up-trend.įigure 1. In addition the level of 50% was added to this set, because it is assumed to be a psychologically important support level. The levels obtained through the use of a Fibonacci sequence are 23.6 %, 38.2 %, 61.8 % and 76.4 %.
In essence these are widely assumed to be better entry points in the direction of the trend, compared to other levels. To start with let’s have a quick recap of what Fibonacci retracement is and what it claims to do.įibonacci retracement levels are calculated by using the ratios obtained through a Fibonacci sequence. In other words, the whole idea is a myth. If they can be explained by chance alone, then we have to conclude that using these reversal lines as a trading signal is no better than picking lines at random. What I will do here is quantitatively measure if reversals around these Fibonacci lines occurs with a higher probability than can be explained by chance alone. I will take an objective look at Fibonacci retracement to see if it actually lives up to its reputation as a predictive tool. In this tutorial I want to take a step back from all of the hype. This method is used by many types of market participants, from individual technical traders through to analysts at the world’s largest financial institutions such as Citigroup, as seen for example here.
Is Fibonacci retracement real or not? © forexopIf you ask any technical trader which charting tool they rely on the most, Fibonacci retracement would probably come fairly high up on the list.