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Friday, October 8, 2010

Fibonacci: Myth And Fact

MY TAKE ON THE SUBJECT

“So I will ask myself this question, to you, as I ask myself: If thousands are using Fib, and most people fail in trading, then does Fibonacci work? Or is it the problem with the trader?” – Tom Hougaard

Hello:

My aim isn’t to debunk or underline the validity of Fib as a trading approach; neither would the extenuating factors about it be accentuated. My heartfelt apologies go to certain readers who might see this article as preposterously, eccentrically sacrilegious and iconoclastic.

When I first started out as a trader, I had my heads in the clouds; thinking I’d be gaining pips copiously. Soon I was reading about many analyses, visiting many websites, sitting glued to my PC more than 8 hours daily, writing down what both technical and fundamental analysts were saying. If almost all of them agreed on a direction of a pair. I traded alongside them. If not all of them agreed, I didn’t enter that trade. Yet I was losing consistently despite considering different analyses by the so-called gurus, before trading. In spite of the use of invariably stringent and cumbersome trading ideas from those glib pros, I was still ignominiously floored by the markets. I still have these notes and diaries with me. I didn’t know that what I needed to be consistently profitable are simple, stupid trading ideas.

Truth will always be bitter. I’m never the best Fib geek in the world – and I’m never an idiot either. It’s not surprising that many traders excessively worship and idolize Fibonacci. Like many others, I thought the more complicated a strategy was, the more it’d outperform the markets. We humans always look for assurances before we do things. We tend to look for certainties – inviolable laws. We want things that are foolproof, so to speak. Traders want constants on the markets; same kind of certainties we look for in everyday life. And… finally we have a constant. Many traders seem to have found that constant in Fibonacci system.

Why would hordes of traders continue to idolize and worship Fibonacci? What’s Fibonacci? Mr. Fibonacci was a medieval mathematician who wasn’t a trader. There is a figure I studied which is called a Vitruvian Man. The famous Vitruvian Man shows Fibonacci ratios of the human body as proven by Leonardo Da Vinci. They’re claimed to be everything in nature, including the financial markets. These ratios and several others derived from them (apparently) appear in nature, and in the financial markets they often indicate levels at which strong resistance and support (apparently) will be found. They’re said to be seen in nature (seashell spirals, flower petals, structure of tree branches, etc), art, geometry, architecture and music. Why are they (reportedly) so important to the financial markets? Because (apparently) the markets tend to reverse right at levels that coincide with the Fibonacci ratios. Whether you see this as a cosmic order or coincidence makes a little difference. It happens that and tens of thousands of traders make decisions based on Fibonacci ratios, thus amplifying the results.

Please let me go back to my early trading years, I love teaching, for I’m a teacher. When I was being taught about Forex, I learned so much myself about the markets through the teaching and more importantly through the eyes of the innocent and uncorrupted mind. I got no ADX portfolio, no malfunctioning ATR experience, and no Parabolic SAR theories. I just stared and watched while my mind was polluted with prefabricated trash.

I thought Fibonacci was the ultimate weapon I could use to subjugate the markets. What I experienced in the long run wasn’t different from what Tom said:’ You could pick up a book on Fibonacci and you will see one convincing example after the next that this really is a law. So did I. I used Fibonacci extensively in my trading. I loved it. It was so great to know exactly where the market would stop. Or should I say, where it was supposed to stop. It didn’t stop where I wanted to, but like any new love relationship you focus only on the positive, and turn a blind eye to all the quirky sides. It wasn’t quite what it was hyped up to be. Truthfully I used to swear by it. It was my constant in an uncertain world. I’d put up with the frequent hit-and-miss. I’d tell myself that it was my lack of understanding of the laws of Fibonacci that caused my poor results. I’d study more, study harder. There came a point where I thought it was pointless. It gave me as many as bad signals as it gave me good signals. Didn’t I see what everyone including Fibonacci could see?’

Why do we freely fail to work on our psychology and also take money management serious? Is there an answer in any strategy whatsoever? If Fibonacci were really working magically, then the proportion of consistently successful traders wouldn’t be 5% or less. Trading with Fib is merely a strategy (not an open sesame to sure profits), being the least important factor in trading success, just like any other trading strategies under heaven. Fibonacci is worth studying – it’s worth using, just like any other trading systems and nothing more. Nothing more for a conspicuously lackadaisical soul who’d take any trading strategy as a tool for easy money, just like any trading styles being used. I’d wish to tell you once again that your success in trading isn’t dependent on your ability to predict the markets; neither my trading strategy nor your trading strategy nor Fib strategy is a Holy Grail. Trading strategies will forever be the least important factors in trading success. But marketers would continue emphasizing them in suave and rather sedate manners.

Shouldn’t I be disheartened by the fact that trading truth is unsavory? Yes many an analyst will continue to flaunt and impress people with Fib ratios. In short order we’re giving the Fibonacci army an extraordinary leeway. Some will use slightly more sophisticated ratios such as 0.786, and even 0.886. Some extremists will find comfort and meaning in the 0.994 and even the 0.236. If they make money with it, good luck to them. I just suspect it’s not the result of any laws, Fibonacci or otherwise. Tom said there’s someone who charged 5000 British pounds for a seminar on Fibonacci. It’s hailed so secretive that disclaimers had to be signed. He’s yet to be seen making money out of it.

Trading truth will always be bitter. Once again, sorry if you’re a reader who’d think this topic is blatantly revealing. I humbly conclude this article with more quotes from Tom Hougaard:

  1. “Discussing Fibonacci is like discussing the bible with a born-again Christian. There’s nothing that works but their chosen belief.”
  2. “Of course it’s like the bible. It is never wrong. If it does not stop at 38, then it will go to the next level. A little bit like when the bible says ‘an eye for an eye’ versus ‘turn the other cheek.’ You are fully covered. You cannot go wrong. Fibonacci traders are the born again Christians of the financial markets.”
  3. ‘‘For every one of your perfectly chosen examples, where the market retraces perfectly into a Fib ratio, I can show two examples on the same chart, where it did not work. I can go through chart after chart after chart and for every example you give me of a Fib set-up, I can show you an example where it did not work.”

Your questions and opinions are highly welcome.

Thank you.

With best regards,

Azeez Mustapha

Forex Signals Strategist, Funds Manager &Coach

Senior Analyst

FX Instructor, LLC

Email: amustapha@fxinstructor.com

Get my Forex trading signals at: http://www.fxinstructor.com/en/analytics/ituglobal

Nice trading tips are available at: www.ituglobalforex.com

And my past articles are also available at: www.ituglobalforex.blogspot.com

Yahoo! Messenger ID: saazalmu

NB: There is risk of loss in trading, but it is possible to be a successful trader.

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