In the search for the holy grail of trading (of which there is none, sorry) dependency on single indicators or mystical numbers become biblical. One reason traders often find themselves on the wrong side of a trade is the over use and dependency on Fibonacci. What is Fibonacci, how should you use it, and is it really mystical?
Fibonacci is a series of numbers that occur naturally in mathematics. From leafs on a tree, bacteria growth, to population growth of rabbits, these naturally occurring numbers create a pattern which Leonardo Fibonacci recognized. From his work, and over time, these sequences have been used in more complex math equations. What is more important in hunting antelope, the birthrate or the migration route? The flow of the herd is more important not the birthrate. You think a herd of antelope goes 1.618 km before they rest? Maybe but the direction they migrate is still more important.
The purpose of a trader is to follow the flow of money. This is one reason we have not been over trading the crypto market. This is simply a market out of favor with traders and investors. Now before I get the 20 charts, and the "I'm killing it" comments from trolls, this is NOT for you. Your killing it so no reason to read further. If you read any book by any successful trader, like Jesse Livermore, it is all about money or order flow. What is the direction and strength of the order flowing and can I ride the wave?
What Fibonacci provides us is the framework and structure to look for . These are not magical numbers that find tops and bottoms in markets, they provide a gauge of market sentiment. In fact these numbers are not more or less relevant than say 0.25 0.33 0.5 0.67 0.75. Actually 0.50 is not a Fibonacci level at all, but often we see reversals in these areas. Failure to understand what these levels are and what they represent will lead to a poor performance over time.
What they do provide traders is a measure of strength or weakness in a market. A strong market will have a shallow pullback, consolidate and continue higher. A weaker market will pullback further. In simple words they provide the framework for order or . Of course there is more to it then that, but this is a basic overview.
You will notice the 6732 is a key level marked on the drawing. This is the 0.618 extension off the previous swings. If a market can push through the 0.618 it provides a sign of strength. Could I change this to the 0.67 extension? YEP and it would work the same. In other words we are looking for strength in a market and Fibonacci provides the framework we use to gauge this by.
This goes hand in hand with . The third wave is the greatest impulse wave so to see it 150-400% of wave 1 is quite common. This is where the bulk of the money flows in so we should see greater move then the 1st wave. This is why the 1.618 and 2.618 extension levels are commonly used. If order flow is exceptionally strong we may see it blow right through the 1.618 hitting the 2.618 extension or 268% of the initial move. A reversal and breakout of a pullback that is only 25% of the initial move implies strength. From this we likely see a strong 5th wave.
Obviously there is more to it then meets the eye. But to think these are some mystical numbers are simply a fools game. They simply provide the framework for structure in the market. Trading these alone, or holding to it hits some magical 12.354885 level is simply a losers game. Markets do not work like that. Order and are the key components that drive a market, not magical indicators or levels. Using Fibonacci among other tools, helps gain perspective as to the flow of money, and in the end that is what traders look for.
Jesse Livermore used to use feeler orders to gain a perspective of the . No different then a poker player that puts out a feeler bet to see the strength of hands after a flop. If you are ignoring order and , no indicator will help you. Just like playing poker with pocket aces and 2 queens hit the board. What do you do just bet because you have aces? No you put out a feeler bet. How the table reacts provides insight into the strength or weakness of an opposing players hand. If one person at the table just calls, it gives you a perspective of the hands they may have. The same goes for trading. Fibonacci is that feeler bet, and how the market reacts around these levels gives us perspective into the strength or weakness of the market.
They simply provide the framework for where we look for strength or weakness.
We still remain long with an initial target of 7045 in the near term. Is this some magical number? Nope and if we see weakness we will adjust as required.