Is Fibonacci simply a B/S system for stock market movements...or is it real?

[RoosterRedux]

I have been a long time fundamental investor and have always done well with fundamentals.

Warren Buffet and his hero, Ben Graham, were my heroes. Ben Graham was taught to me in undergrad and grad school.

But as someone who specialized in math (operations research/economic modeling) in grad school, I am digging into the Fibonacci sequence to see if it holds any significance in stock trading.

As an aside, as I am getting older, I find myself wanting to increase the power of my portfolio (such as it is) by trading.

Hence, the Fibonacci factor.

Your thoughts please re: Fibonacci please?

[VA Voter]

You need better tools than Schawb. Try ThinkorSwim and StockCharts(study their chart school). They are both free, which should NOT be your criteria.

Be prepared to lose a lot, at first. If it was easy everyone would be doing it.

I make a living trading all day every day. It is one of the hardest things I ever learned. You should follow some trading blogs to learn the lingo and find a combination of things that fit your unique strengths and weaknesses.

Be prepared to lose a lot of money.

Fibs can be helpful but are only one of about 6-12 factors you will finally pick to rely on. More than that is just noise and will confuse you on making actual buy/sell decisions.

Be prepared to lose a lot of money.

It will take you thousands of hours to get good at trading, if at all.

[Joann37]

ping for later (lots of good comments in this thread).

[ez]

Two guys came to our office one day to sell us a can’t fail stock picking system. I asked them, if the system is so good, why not just use it and get rich instead of riding around giving sales pitches? They said they wanted to share the wealth with others. I said have a nice day.

[FerociousRabbit]

Fibonacci ratios have zero significance in predicting market movements in my opinion. Is there any more significance to be had with with 38.2% than 38.4%? No, of course not. How about when you compare the 61.8% level with 62.2%? Again, of course not.

How about the most widely touted level, the 50% level? Technically, I don’t think it even is a Fibonacci ratio but trading tools include it because it works just as well as actual Fibonacci ratios so now you are trading with Fib ratios that aren’t even Fib ratios!

Random lines drawn on a chart do no better and no worse in my experience. So why are they so widely used? Got me. I guess people feel they are mystical, magical and mathematical and need to believe there is some easy way to pinpoint what the markets will do in the future.

The Fibonacci sequence is great if you want to predict the population growth of rabbits but for every example where you can show me that price respects fib levels I will show you ten where it doesn’t.

Markets obey the laws of supply and demand and are not bound by the ratios of a specific series of numbers. If trading could be reduced to a simple series of numbers then we wold all be billionaires.

[ken5050]

OK, you sold me on it. I’d like to buy some Fibonacci, but can’t find it listed on any exchange...heck, I can’t even find the ticker symbol.

[Hop A Long Cassidy]

Using prices to predict prices is hardly causal.

Nassim Nicholas Taleb, author of “Antifragile” and “The Black Swan” believes that markets are complex systems and are therefore unpredictable.

Certain billionaires have been successful using insider trading.

Good luck...

[loungitude]

It isn’t perfect, but it is free.

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

The food is terrible, but the portions are HUGE!

[VA Voter]

“Using prices to predict prices is hardly causal.”

Yes, it is not causal, but often times directionally probable. It is that probability recognition that makes trading possible.

[Tammy8]

I don’t personally know anything about trading, but a very wise and wealthy man I worked for said anyone that wanted to trade would be better off to go to Vegas, he felt gambling was the same game, but you would know sooner whether you won or lost.

[VA Voter]

“Using prices to predict prices is hardly causal.”

Yes, it is not causal, but often times directionally probable. It is that probability recognition that makes trading possible.

[PieterCasparzen]

Trading algorithms of any kind that are only based on trading data do not account for non-public information about specific companies (known for the most part only internally by management of the company).

Public information about a "good outlook" for future company performance is frequently internally known to be not as good as perceived by the public. While a company may say, for example, they are confident that their new product launch will boost revenue by effectively beating their competitor's product line, insiders may well know that their situation is much more dire than they report externally. Company management is not supposed to spread "hype", but then again that's to one extent or another what PR and marketing are all about. Eventually, of course, bad news will break, and the stock will take a tumble. But the only trading activity that would reflect such an impending drop would be insider trading, since the "bad news" was previously non-public information. A 10-year chart on Blackberry, Ltd. and a review of contemporaneous news articles pretty much will drive this point home (I highly recommend taking a gander at that 10-year chart).

Then there's the non-public bad information that management just does not talk about in quite enough detail. This investopedia article, Case Study: The Collapse of Lehman Brothers details a recent dramatic case of this. From the article:

"The Prime Culprit

The Prime Culprit In 2003 and 2004, with the U.S. housing boom (read, bubble) well under way, Lehman acquired five mortgage lenders, including subprime lender BNC Mortgage and Aurora Loan Services, which specialized in Alt-A loans (made to borrowers without full documentation). Lehman's acquisitions at first seemed prescient; record revenues from Lehman's real estate businesses enabled revenues in the capital markets unit to surge 56% from 2004 to 2006, a faster rate of growth than other businesses in investment banking or asset management. The firm securitized $146 billion of mortgages in 2006, a 10% increase from 2005. Lehman reported record profits every year from 2005 to 2007. In 2007, the firm reported net income of a record $4.2 billion on revenue of $19.3 billion. (Check out the answer to our frequently asked question What is a subprime mortgage? to learn more about these loans.)

Lehman's Colossal Miscalculation

Lehman's Colossal Miscalculation In February 2007, the stock reached a record $86.18, giving Lehman a market capitalization of close to $60 billion. However, by the first quarter of 2007, cracks in the U.S. housing market were already becoming apparent as defaults on subprime mortgages rose to a seven-year high. On March 14, 2007, a day after the stock had its biggest one-day drop in five years on concerns that rising defaults would affect Lehman's profitability, the firm reported record revenues and profit for its fiscal first quarter. In the post-earnings conference call, Lehman's chief financial officer (CFO) said that the risks posed by rising home delinquencies were well contained and would have little impact on the firm's earnings. He also said that he did not foresee problems in the subprime market spreading to the rest of the housing market or hurting the U.S. economy. "

Of course this is failure of an uncommonly large magnitude and effect, but a similar lack of "transparency" exists in all exchange-traded firms - it's just how the financial world works. You just don't have quarterly earnings calls that focus on systemic, core problems - and not offer some offsetting positive outlook. "The ship may sink, but we plan on converting to a submarine if it does".

In terms of whole industries and markets, news headlines pop up now and then that break a new story thread that can have dramatic effect on other markets, i.e., commodities, etc., which then affects stock prices across the board, and can also affect the economy as a whole, which in turn can, of course, affect stock prices as well.

The technical trader is taught to believe that traders find out news very early and thus trading activity reflects changing conditions outside of the exchange such as breaking news and economic reports. If that is so, whoever does know key information in advance and trades on it must be very good at masking the news implications of their trades, because big breaking stories never cease to affect equity prices in a relatively dramatic way, i.e., surprising the rest of us.

[chuckles]

I pretty much agree with post #5. I use Fibs, but that's not all I look at. Filling gaps is one thing to look at. Fib levels another. Double tops and double bottoms work many times. Back test with Fib levels and see if the levels line up and trade accordingly. If you sell on a level and it is bought out or beats on earnings, it could rocket higher and you kick yourself. If it misses earnings or the CEO does a perp walk, the Fib levels won't work. Pick a non volatile company that is boring, you might have some luck.

I also use an option open interest indicator to guess the range for a stock. If stock ABC has 11,000 calls open @50 and 12,000 puts open @45, and the rest of the strikes have just a few hundred open interest, IMO, the price for the stock will generally be trapped between $45-$50 on expiry day. If the stock is say, $45.25 today, a call could be bought today in hopes the stock would be headed for $50 in the next few weeks. If the stock is $49.50, I would look to sell the call if you have one and buy a $45 put and anticipate the stock to head south. Don't try to make every dime, a $2-$3 dollar move in the stock should make you a profit and get out. If you guess wrong, you lose the price of the put or call and your out.

There are many things I look at while trading and you have to look at all of them and agree that your thesis is right. I don't know anyone that can use one signal and stay solvent very long. I've been trading since Nixon and retired at 50, 12 years ago. Still trading today.

[RoosterRedux]

Thx much guys for all your great comments. Very helpful.

[HippyLoggerBiker]

The only surefire way to make a small fortune in the stock market is to start with a very large one./s

[VA Voter]

Rooster, Cycle through these for a basic intro:

http://www.informedtrades.com/index.php?page=freetradingcourses

Good luck.

[RoosterRedux]

Thx much!