Free Republic
Browse · Search
General/Chat
Topics · Post Article

Skip to comments.

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

Posted on 01/20/2014 4:28:48 PM PST by 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?


TOPICS: Business/Economy
KEYWORDS: fibonacci; finance; investing

1 posted on 01/20/2014 4:28:48 PM PST by RoosterRedux
[ Post Reply | Private Reply | View Replies]

To: RoosterRedux

BTW, the chart system I use is the Street Smart Edge from Charles Schwab (free). It isn’t perfect, but it is free.


2 posted on 01/20/2014 4:30:05 PM PST by RoosterRedux (The only true wisdom is in knowing you know nothing -- Socrates)
[ Post Reply | Private Reply | To 1 | View Replies]

To: RoosterRedux

“BTW, the chart system I use is the Street Smart Edge from Charles Schwab (free). It isn’t perfect, but it is free.”

It isn’t free if it doesn’t work...


3 posted on 01/20/2014 4:38:36 PM PST by babygene ( .)
[ Post Reply | Private Reply | To 2 | View Replies]

To: RoosterRedux

I think the “Big W” observation has more credence than Fibonacci.

Just MHO...


4 posted on 01/20/2014 4:41:19 PM PST by Paisan
[ Post Reply | Private Reply | To 2 | View Replies]

To: RoosterRedux

I’ve been at this for a long long time.

The Fib fans when pressed will tell you that “It works, until it doesn’t”.

Elliot Wave is a cult. They use fibs, and will always blame themselves for their error, not the system.

There are many automated trading programs that use some form on Fibonacci, in this regard, it can become “self-fulfilling”.

When using a fib tool there are any number of theory’s about where you should “Start”. Should you take the “low point” or the “beginning” of the move ?

Btw, there are a boat load of “Free” analysis tools available. Free being the operative word.

That being said, Fibs are good as a “Supporting” tool. Not the only tool.

The shorter your time frame, the less effective they become.


5 posted on 01/20/2014 4:46:19 PM PST by Zeneta
[ Post Reply | Private Reply | To 2 | View Replies]

To: babygene
Well, I haven't actually invested using the Schwab Street Smart Edge.

So are willing to elaborate?

6 posted on 01/20/2014 4:50:47 PM PST by RoosterRedux (The only true wisdom is in knowing you know nothing -- Socrates)
[ Post Reply | Private Reply | To 3 | View Replies]

To: Zeneta
I have used the Fib graphing instrument provided by Schwab and have check it using excel (to make sure it is accurate)...But I must admit that my use of Fibs is not retracement but high resistance to low support..

I haven't used it as a trading tool but I have found it rather correct on certain stocks and ETF's. On the stock I am following, it is on the money when producing upper resistance levels and lower support.

7 posted on 01/20/2014 4:55:57 PM PST by RoosterRedux (The only true wisdom is in knowing you know nothing -- Socrates)
[ Post Reply | Private Reply | To 5 | View Replies]

To: RoosterRedux

Yes, the .38 and .5 fibonacci is essential for trading.


8 posted on 01/20/2014 4:57:37 PM PST by montag813
[ Post Reply | Private Reply | To 1 | View Replies]

To: Zeneta
I started looking at the Elliot Wave Theory back in the early 1980's when the uncle of my wife dug up Robert Prechter and his material.

I somehow thought it was B/S.

But Fibonacci is not Elliot Wave Theory. That said, it may be B/S...but it isn't EWT.

9 posted on 01/20/2014 5:01:29 PM PST by RoosterRedux (The only true wisdom is in knowing you know nothing -- Socrates)
[ Post Reply | Private Reply | To 5 | View Replies]

To: montag813

Could you please elaborate just a little?


10 posted on 01/20/2014 5:02:33 PM PST by RoosterRedux (The only true wisdom is in knowing you know nothing -- Socrates)
[ Post Reply | Private Reply | To 8 | View Replies]

To: RoosterRedux
Cramer may be the most fundamentalist (and consistently wrong) trader on the planet and every so often will feature different chart analysts one of whom is Carolyn Boroden(?). See her work at www.fibonacciqueen.com...she has a free daily video, a reasonably priced trial offer and has authored a book. Check her out. She has some good ideas and well thought out trading rules based on her work. If you are an investor, you may be biased against her approach. If you are a trader and can grasp her concepts, there is no reason why those concepts cannot be applied to intraday, daily, weekly or monthly chart analysis.
11 posted on 01/20/2014 5:02:37 PM PST by cashless (Obama told us he would side with Muslims if the political winds shifted in an ugly direction. Ready?)
[ Post Reply | Private Reply | To 1 | View Replies]

To: cashless

Thx! Will check it out!


12 posted on 01/20/2014 5:04:31 PM PST by RoosterRedux (The only true wisdom is in knowing you know nothing -- Socrates)
[ Post Reply | Private Reply | To 11 | View Replies]

To: RoosterRedux

Greatest video ever on investing.
www.youtube.com/watch?v=qqF83-FmVpM

13 posted on 01/20/2014 5:14:24 PM PST by outofsalt (If history teaches us anything it's that history rarely teaches us anything.)
[ Post Reply | Private Reply | To 1 | View Replies]

To: RoosterRedux

Here’s what I know.

I ran a Daytrading office back in the day and used virtually ever “tool” available to find trades. They worked until they stopped working. Some of them worked for weeks or months at a time, then nothing.

It comes down to “Risk management” and the consistent application of those rules. It’s the only way you can measure their usefulness over time. Most people can find something that seems to be working and they will increase their risk, since it seems to be working, and they will blow up their account.

If you consider probably the most famous group of traders, “The Turtles”, the guy that developed this trading system stated in a WSJ interview that “I could publish the rules for this trading system and well over 80% of people wouldn’t follow them”. Even if they knew that following the rules would make them money.

You need to develop a set of rules.

if this, and that, then, push the button.

Test it in real time. Backtesting doesn’t work.

Be consistent in your application so you can measure it’s effectiveness.

If you find something that always works.

Don’t tell ANYBODY. They will find it soon enough, so you need to maximize your profits while you can.

Best of luck.


14 posted on 01/20/2014 5:14:56 PM PST by Zeneta
[ Post Reply | Private Reply | To 7 | View Replies]

To: Zeneta

Fibonacci is more of a confirmation indicator for me. It works similar to other well known indicators in that if enough people believe it works then it will. Lots of people throw up fibs waiting for a retrace and buy back at that point so if enough people believe it works. Other theory would be fibonaccis pretty much explain the universe so it has to work!


15 posted on 01/20/2014 5:22:31 PM PST by CrouchingTiger620 (is it possible to 45th worse out of 44)
[ Post Reply | Private Reply | To 14 | View Replies]

To: RoosterRedux

To be clear.

Fibonacci is not EWT, but EWT uses fibs.


16 posted on 01/20/2014 5:23:11 PM PST by Zeneta
[ Post Reply | Private Reply | To 9 | View Replies]

To: CrouchingTiger620

I agree, Fibs are “confirmation” not “Justification”.


17 posted on 01/20/2014 5:25:16 PM PST by Zeneta
[ Post Reply | Private Reply | To 15 | View Replies]

To: RoosterRedux

Rubbish. Technical trading is rubbish.


18 posted on 01/20/2014 5:26:42 PM PST by dinodino
[ Post Reply | Private Reply | To 1 | View Replies]

To: dinodino

I started out as a fundamental investor/trader, I moved into trading, 100 plus trades a day, on technical’s and other market/price action based on “Market mechanics”.

Using indicators for primary decision making doesn’t work.

There are however, other ways to look at a chart then an opportunity to slap some Moving Avg’s, Fibs, RSI etc, in order to find trades.


19 posted on 01/20/2014 5:38:45 PM PST by Zeneta
[ Post Reply | Private Reply | To 18 | View Replies]

To: RoosterRedux
Let me start with full disclosure:Have not trade stock in years and was never successful anyway. Doesn't mean I don't have an opinion.

Many years ago I read a book the title of which I believe the name was “The Encyclopedia Of Technical Market Indicators” first edition.

In it the authors did an analysis table of results of computer trading the NYSE index over the same years with each index. The chart showed the positive or negative lump sum results of the trades and how many trades, average trading length etc.

One column that stuck in my mind was the percent of winning trades. This showed me at the time that all the most popular trading indicators, most of which I forget the names, and were indices touted by Stockbrokers such as MACD, Stochastics and more had winning percentages in the mid 30% to the mid 40% level. The siimple 40 day moving average was 25% as a benchmark. That surprised me because my computer blackjack playing taught me that I did not start really making money until my winning percentage reached 55-60% wins.

Hidden away in the details and not presented in the table was a method called Trailing Reversal. If memory serves it is a percent or amount from a previous close that triggers a buy or sell.

What surprised me about that indicator was it had a much higher win ratio of about 66% if I remember correctly.

Now here is an indicator much less hoopla and math behind it with a better winning ratio. The book simply noted that it deserved better scrutiny than what they could provide.

20 posted on 01/20/2014 5:41:54 PM PST by Hang'emAll (If guns kill people, do pencils misspell words?)
[ Post Reply | Private Reply | To 1 | View Replies]

To: RoosterRedux

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.


21 posted on 01/20/2014 5:43:06 PM PST by VA Voter
[ Post Reply | Private Reply | To 1 | View Replies]

To: RoosterRedux

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


22 posted on 01/20/2014 5:55:00 PM PST by Joann37
[ Post Reply | Private Reply | To 1 | View Replies]

To: RoosterRedux

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.


23 posted on 01/20/2014 5:56:13 PM PST by ez (Muslims do not play well with others.)
[ Post Reply | Private Reply | To 2 | View Replies]

To: RoosterRedux

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.


24 posted on 01/20/2014 6:06:08 PM PST by FerociousRabbit
[ Post Reply | Private Reply | To 1 | View Replies]

To: RoosterRedux

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.


25 posted on 01/20/2014 6:36:58 PM PST by ken5050 (This space available cheap...)
[ Post Reply | Private Reply | To 1 | View Replies]

To: RoosterRedux

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...


26 posted on 01/20/2014 6:44:40 PM PST by Hop A Long Cassidy
[ Post Reply | Private Reply | To 1 | View Replies]

To: RoosterRedux

It isn’t perfect, but it is free.

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

The food is terrible, but the portions are HUGE!


27 posted on 01/20/2014 6:52:17 PM PST by loungitude (The truth hurts.)
[ Post Reply | Private Reply | To 2 | View Replies]

To: Hop A Long Cassidy

“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.


28 posted on 01/20/2014 6:54:44 PM PST by VA Voter
[ Post Reply | Private Reply | To 26 | View Replies]

To: RoosterRedux

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.


29 posted on 01/20/2014 6:54:56 PM PST by Tammy8
[ Post Reply | Private Reply | To 1 | View Replies]

To: Hop A Long Cassidy

“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.


30 posted on 01/20/2014 6:55:11 PM PST by VA Voter
[ Post Reply | Private Reply | To 26 | View Replies]

To: RoosterRedux
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.
31 posted on 01/20/2014 8:00:45 PM PST by PieterCasparzen (We have to fix things ourselves)
[ Post Reply | Private Reply | To 1 | View Replies]

To: RoosterRedux
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.

32 posted on 01/20/2014 11:39:54 PM PST by chuckles
[ Post Reply | Private Reply | To 1 | View Replies]

To: All

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


33 posted on 01/21/2014 5:09:09 AM PST by RoosterRedux (The only true wisdom is in knowing you know nothing -- Socrates)
[ Post Reply | Private Reply | To 32 | View Replies]

To: RoosterRedux

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


34 posted on 01/21/2014 8:04:01 AM PST by HippyLoggerBiker (Always carry a flagon of whiskey in case of snakebite and furthermore always carry a small snake.)
[ Post Reply | Private Reply | To 33 | View Replies]

To: RoosterRedux

Rooster, Cycle through these for a basic intro:

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

Good luck.


35 posted on 01/26/2014 7:22:25 PM PST by VA Voter
[ Post Reply | Private Reply | To 1 | View Replies]

To: VA Voter

Thx much!


36 posted on 01/27/2014 4:02:22 PM PST by RoosterRedux (The only true wisdom is in knowing you know nothing -- Socrates)
[ Post Reply | Private Reply | To 35 | View Replies]

Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.

Free Republic
Browse · Search
General/Chat
Topics · Post Article

FreeRepublic, LLC, PO BOX 9771, FRESNO, CA 93794
FreeRepublic.com is powered by software copyright 2000-2008 John Robinson