Fibonacci Retracements are Useless

The idea of having a formula that will magically predict the end of a correction period (Fibonacci retracements) sounds awesome.

Sounds like a tool everyone would like to use (including myself)…

But, does it really work?

That’s exactly what we are going to discover in this article, so please, fasten your seat belt.

Fibonacci Retracements

Basically, Fibonacci retracements are used to identify the end of a correction period. Traders use these levels to find possible entries, specially when the market is trending up or down.

For instance, lets say that the market is trending up, after a major swing, the market will retrace back to either: 38.2%, 50%* or 61.8% (according to the Fibonacci Retracements, these are the most common retracement levels).

*50% is not a number found in the Fibonacci sequence, it comes from the Dow Theory, but most charting packages use it as a Fibo level, so we’ll consider it as a retracement level.

After a mayor advance, the market is expected to correct a portion of the prior advance, which according to Fibonacci retracements, could be 38.2%, 50% or 61.8% form the previous advance.

Sounds good right?

Lets look at some charts…

This is the EURNZD 1D Chart:

To get the retracement levels, you need to select your Fibonacci retracement tool on your charting package, draw a line from top to bottom and you’ll get the retracement levels automatically.

In this case, looks like the correction ended at the 38.2% retracement level. In theory, it is likely to resume its uptrend.

Here is another example:

AUDUSD 4H chart:

In this case, the AUDUSD bounced back to the 61.8% retracement level…

It makes sense correct?

The Case Against Fibonacci Retracements

In theory this is awesome, having a magical formula that somehow knows exactly at what level the market will retrace to is just perfect.

A very handy tool that could help us getter results… yeah right!

Trader, if you’ve never use it, please save yourself some money and time and forget about it!

If you are currently using it, think about it for a moment…

Does it really make sense? That this magical formula knows exactly at what level the market will retrace back to every single time?

It just doesn’t my friend, it doesn’t make sense. There is no magic.

Let me ask you one question, would you rely on something that you don’t understand? Of course you know what the formula is and everything, but do you know the “why’s”?

Why is it that the market needs to retrace back to these levels?

Let say you are a full-time trader, and you need to pay the rent or mortgage, your child’s school and utilities… would you rely on something you don’t understand?

I know I wouldn’t. If I need to pay the rent, etc I need to feel confident about the way I’m trading, and in order to feel confident about it you need to know your strategy inside out, you need to understand the market you are trading, the system you are using, etc.

But again, if you ask me if I would I like to have a tool like that? Of course I would… but it just doesn’t exist.

You never know when a correction is over until it has already happened!

Fibonacci retracements on hindsight are very simple to determine. But try it on the right hand side of the chart… Very difficult ha?

Its exactly the same feeling you get when using a MA crossover, when you look at them on hindsight its very simple, but try it live and you end up with frustrated and with an empty account.

Relying solely on Fibonacci levels is suicidal.

Why is it that Fibonacci Retracements are used by a ton of traders?

Before I continue, let me tell you that at one point in my career as a trader I used it, I even used other related tools and types of analysis like Elliot Waves, and others.

Ok, now to the answer… I think there are two possible reasons:

1 – Its humane nature to try to find a “reason” for everything.

That’s the reason there are thousands of technical indicators… traders are always trying to figure out what “made” the market behave like that…

So it would be like this: Ahhh now I know why I got stopped out… I took my trade at the 38% retracement, and the market actually retraced back to the 62% retracement level…

You see what I mean?

And the second reason…

2 – Now you can blame something else…

If you are like most traders, we don’t like to take responsibility of losing trades. So if the market didnt behave as expected… you would go like: Ahhh this Fibonacci thing didnt work…

Do you agree with me?

How you need to trade

I think that the best way to trade, is to understand what the market is doing. Once you have a complete understanding of what the market is doing, you adapt your system, and trade accordingly.

That simple, if the market is ranging, look for trade opportunities on both extremes of the range.

If its trending up, look for longs, if the market is trending down, look for shorts.

If you have no idea of what the market is doing, don’t trade it, and find another instrument that is clearer.

It is very important not to focus in one oro two instruments. Everyday you need to find the instruments that have the clearest market conditions, and focus on them!

What about Elliot Waves and other types of analysis that rely on Fibonacci?

Forget about them! They are even worse, but that’s another story, we’ll talk about that later.

Your Turn

Do you use Fibonacci?
What do you think about it?
Do you agree with me?

Please comment

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Raul Lopez

I've been trading the markets for more than 15 years. I believe the best way to trade is by adapting to the market conditions. You can learn it too, join our community .

  • Adrian Friday

    I don’t use Fibs in my trade executions but I do use them along with MAs to play defense once my trade is in profit. To me it’s like looking for speed bumps in the road ahead.

    • Raul Lopez

      I see what you meen Adrian… It’s always good to get help to close your trade (or to take partial profits) once in profit!

  • Colin Taylor

    I wouldn’t say they are useless.

    That’s like saying support/resistance areas/ zones are useless or price action is useless because it doesn’t always
    work.

    It all comes down to how one uses any of the “tools” we have access to.

    … basing a trade on 1 single piece of “evidence” is never a good idea

    BUT to base a trade on several ….. example long 4hr chart

    -market has retraced to 61.8 fib level

    -we have trend line supporting

    -we also have horizontal support

    -and the rsi is oversold (once again it comes down to how the indicator is used)(not basing the trade on this)

    -and we are at a whole #

    -and overall trend – weekly, daily is up

    makes complete sense, so I think a more accurate statement might be …..

    “Fib levels are useless UNLESS you know how to use them properly”

    Which applies to any of the “tools” a trader might have access to.

    Kinda like saying …. ” intra day trading is useless” because of the noise on fast time frames.
    BUT for those people who have been taught properly and know how to trade it effectively. It
    works for them.

    You can take 5 professional traders, a pivot trader, a fib trader, elliot wave, gann , reg ole s/r trader etc etc
    and several of the zones all match up with what ever “tool” that specific trader uses to trade.

    Most people attempting to trade never use the “tool” how it was intended to be used in the first place.

    • Raul Lopez

      Hello Colin,

      I think the main difference between classic S&R level and Fib levels is that on classic S&R levels, the market has actually been rejected (at least twice) from those levels, you dont know the reason, but you know that those levels have been important so far.

      Now the problem with Fib levels is that we come up with those levels using a formula, that’s very subjective…

      What would you take in consideration: a level that the market has shown you that its important, or a level that comes up using a “magic” formula?

      Again Colin, I really appreciate and welcome your comments!

  • Maryna Murray

    Very interesting observation and especially knowing that so many traders use FIBS. Like any other indictor/tool they sometimes work and sometimes don’t and the same can be said for Pivot traders. I use clear charts with support/resistance levels only and will sometimes use a 10/20 EMA, but that is as far as the use of indicators goes for me. They are all lagging, so what’s the point of using them, even MA’s!! None of these indicators consider fundamental or economic news and just look what a 5 min speech of Theresa May did to the market this week! Sadly, it’s human nature for people to use indicators as it gives them some sort of confidence/security? So glad you brought this up Raul. However, I hear that large institutions use Pivots – any truth in this?

    • Colin Taylor

      Once again I think it comes down to how the tool is used, so many aspiring traders are using indicators incorrectly.
      10 and 20 for dynamic s/r works WHEN you add it to trend direction, candle pattern, chart pattern etc etc
      Like I assume you use it for in your trading and I know several people do and that works.

      Just like 50 or 200 works providing it is used in the correct market context.

      If you take a professional trader and tell him to trade the 10 and 20 ema crosses he can make it work, he will
      be profitable because he will take in all his knowledge and the trades he takes will be supported by several
      different pieces of info NOT just the crosses of the 10 and 20 emas.

      Give the 10 and 20 ema crosses to a new trader and flunk city.

      Yes we hear it time and time again indicators lag however indicators do what they are supposed to do and
      that is ….. indicate, they were never really designed to be triggers into the market. They were designed to
      help support a traders decision. They were always designed to be secondary in the decision making process
      and to help support a traders “idea” but with the invent of the web and online trading over the last 10 years
      or so peoples thinking about trading is backwards.

      ” I don’t have to know how to trade – I will just go long or short when the squiggly line crosses the thick solid
      blue line and i will make millions because I am sure that is how the guys on wall st do it”

      You can have the best system, method in the world but if you don’t know how to trade – that system, method will
      do very little – if your understanding and general knowledge about the markets, price action, chart action, time frames, s/r etc etc is nil then your probably outta luck. O and I didn’t even touch on money management or fundamentals that’s a whole diff discussion.

      Geez there really is more to trading then the squiggly lines ….. darn

      • Raul Lopez

        You are right Colin… most indicators work do what they are supposed to do, as you say “indicate”… unfortunately most traders used them as entry signals, and that’swhen the problem starts!

        Thank you for your comment, adds to the conversation!

    • Raul Lopez

      I agree with you… I think there is no point of using them if at the end they are all lagging indicators…

      It’s best to trade using objective date, like S&R levels, where the market has actually reacted to…

      Thank you for your contributions!