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.
The reason why normal strong support and resistance levels work so great, is because
almost everyone is going to see them at the same price.
But in trading where every trader looks at the swing low and swing high differently,
the fibonacci value is not going to be at the exact same level. Furthermore, fibonacci
has so many levels that some traders can get confused about which level is giving the real
reversal sign, in other words, from what level is the price reacting. This makes fibonacci
trading really inefficient when compared to other trading tools like the V WAP indicator.
Furthermore, backtesting the fibonacci tool can be really difficult because fibonacci
requires you to draw from the swing low to the swing high and vice versa. When you try
to backtest, this swing low and swing high will become very biased.
In the other trading strategies I have tested 100 times on the Trading Rush channel, I took
trades by looking at the indicators and not the price itself, and since non repainting
indicators look exactly the same on liive markets and while backtesting, the backtesting
data was unbiased.
Now, one can recommend using the zig zag indicator while backtesting the fibonacci levels. This
way, you won't have to think about the swing low and swing high while backtesting. And
That's what I did. Since many traders believe that most of the time price retraces near
the 50 fibonacci level, I tested the fibonacci trading strategy 100 times to find the truth.
Although the zig zag indicator was able to show proper swing lows and swing highs most
of the time, it is not a perfect indicator. Some swing lows and swing highs according
to the zig zag indicator were not accurate, but since swings of a trend can differ from
trader to trader, this small number of less accurate swings were fine. And when the zig
zag lines were looking like a mess, no swings of a trend were considered while backtesting.
Since price does not react at the fibonacci levels exactly, I only considered a fibonacci
level if price had reversed near it. By near I mean, if price reversed from 5 percent
above or 5 percent below it.
Since fibonacci is mostly used in a trending market, I used the 200 period moving average
to find the trend. When most part of the swing low and swing high was on the one side of
the moving average, I consider the fibonacci level. Furthermore, in an uptrend, the swing
high has to be higher than the previous swing high. Similarly in a downtrend, the swing
low has to be lower than the previous swing low.
So after backtesting the fibonacci tool 100 times, here's what I found out. Only 6 percent
of the time price reacted near the 23.6 level. 18 percent of the time near the 38.2 level.
14 percent of the time near the 50 level. 15 percent of the time near the 61.8 level.
14 percent of the time near the 78.6 level. And 33 percent of the time price either reacted
from the 100 level or went straight through all the fibonacci levels. That make sense
since price is in a range most of the time, but one thing to consider from this data,
is that except from the 23.6 level, price reacted from all other levels the same way.
That is not a good thing. In an uptrend, since the price is going to reverse with a higher
swing low anyway, and since there is no significant difference between the levels, one can say
that the fibonacci levels hold almost no significant value in trading, especially when compared
with other things like normal support and resistance.
The only reason people think fibonacci works in trading, is because they believe it works.
One can argue that this data was not enough to be judged on. Maybe, but after testing
many different trading strategies 100 times on the Trading Rush channel, and taking virtual
trades 10000 times to see how close are we to the actual win rates, we have seen that
the strategies that actually perform good, give very good profit numbers after backtesting
only 100 times. For example, popular trading strategies like the MACD, Ichimoku cloud,
bollinger bands, that are trusted and used by many professional traders, gave very good
win rates after we backtested them 100 times. It will take many months to take 100 trades
for many traders in liive markets anyway. The question is, will you keep using a strategy
that doesn't make profit even after multiple months, when there are strategies that have
the potential to make almost 50 percent in the same time period. Most probably won't
use a strategy that keeps them in a loss in the long term.
If you want to see the best trading strategies that performed really well, you should check
out other trading videos on the Trading Rush channel.
That's all. Now you know a little bit more about fibonacci trading. Like the video if
you liked it. Subscribe to the Trading Rush channel and ring that notification bell to
see more trading strategies tested 100 times. Check out the Trading Rush app using the
link in the description. Maybe consider supporting the channel on Patreon. Thanks a lot.