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Is Fibonacci Trading Strategy Good? What is and How to trade Fibonacci in Forex and Stock Market Trading? Does Fibonacci Retracement Tool work?
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Does Fibonacci trading strategy even work? Should you trade using the Fibonacci retracement tool? I have tested many strategies on the Trading Rush channel, and almost every other day, there is a comment about testing the Fibonacci trading strategy or to give my thoughts on it. Until now, I have avoided making a video about the Fibonacci trading strategy, because the idea of Fibonacci in trading sounds really stupid. But that’s my personal preference, and as you know, on the Trading Rush channel, we keep personal preferences aside and only talk with the real world data. In this video I’ve tested the Fibonacci retracement tool 100 times to see if it works or not, but unlike other indicators we have tested on the Trading Rush channel, Fibonacci can’t be backtested. Let me explain.
You see, there are many people who believe that the fibonacci tool is really good for trading, but then there are traders who believe that fibonacci levels are just some useless lines on a chart. Now remember, almost 90 percent of retail traders lose money in trading. So instead of believing other people, let’s look at the real data and understand how fibonacci actually works.
Fibonacci was a medieval mathematician, and came up with a sequence that goes something like this. 1+1=2, 2+1=3, 3+2=5, 5+3=8, and so on. Here, each new number is sum of the 2 numbers before it.
Now, if you take any number from this sequence, and divide it with the next number, you will get a value of 0.618.
If you divide any number with every other number on this sequence, you will get the value of 0.382.
And if you divide any number with 3rd number next to it, you will get a value of 0.236. Furthermore, if you divide 1 and 2, you will get a value of 0.5.
You probably noticed that these are the same numbers you will find on a fibonacci tool. On many charting platforms, these numbers are turned into percentages. So the 0.382 becomes 38.2 percent. 0.618 becomes 61.8 percent, and so on.
These fibonacci numbers are found almost everywhere in the nature. From the shape of the galaxy to the number of petals on a flower. Since the fibonacci is found almost everywhere in the nature, many traders believe that fibonacci can also be applied in trading.
So, people started applying the fibonacci tool when the charting platforms provided.
It is widely believed, that since price doesn’t go in the straight line in one direction, when the price is in a trend, the price will retrace at the fibonacci level, hence the name fibonacci retracement tool.
So in an uptrend, if you take the fibonacci tool from the swing low to the swing high, it is said that the price has a higher probability of reversing near the fibonacci levels. Some traders like to give higher importance to the 50, 61.8 and 38.2 levels.
Now here’s a big problem, unlike other indicators who actually take real market data to calculate their values, fibonacci draws levels that have almost no relation to the actual market data. Many fibonacci fan boys will buy stock or a forex pair because the number of petals on a flower or the shape of the snail’s shell is based on the fibonacci.
For example, the V WAP tool that I have recommended many times on this channel, takes the real volume traded on a stock to calculate it’s value, fibonacci doesn’t do anything similar to that.
One might say, that fibonacci does take market data like the swing low and swing high into consideration. Well yes, but that’s actually a problem.
You see fibonacci numbers have almost no real useful value in Trading. It has great importance outside of the financial markets. The only reason why fibonacci works, is because people believe it works. If enough people believe that the 50 percent retracement level works as a reversal point, many people will enter trade near that level, which will make the price go in the desired direction.
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Gann taught a subject called “Time and Price Squaring”. Look at it as equipping yourself with more weapons to enter into fight with. They get rid of the requirement for analyzing what’s happening on your charts.
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