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I tested Fibonacci Trading Strategy 100 TIMES to find the truth about Fibonacci Retracements - YouTube
Channel: TRADING RUSH
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Does Fibonacci trading strategy even work?
Should you trade using the Fibonacci retracement
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tool? I have tested many strategies on the
Trading Rush channel, and聽almost聽every other
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day, there is a comment about testing the
Fibonacci trading strategy or to give my thoughts
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on it. Until now, I have avoided making a
video about the Fibonacci trading strategy,
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because the idea of Fibonacci in trading sounds
really stupid. But that's my personal preference,
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and as you know, on the Trading Rush channel,
we keep personal preferences aside and only
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talk with the real world data. In this video聽I've
tested the Fibonacci retracement tool 100
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times to see if it works or not, but unlike
other indicators we have tested on the Trading
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Rush channel, Fibonacci can't be backtested.
Let me explain.聽
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You see, there are many people who believe
that the聽fibonacci tool is really good for
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trading, but then there are traders who believe
that fibonacci levels are just some useless
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lines on a chart. Now remember, almost聽90
percent of retail traders lose money in trading.
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So instead of believing other people, let's
look at the real data and understand how fibonacci
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actually works.
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Fibonacci was a medieval mathematician, and
came up with a sequence that goes something
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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
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2 numbers before it.
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Now, if you take聽any number from this sequence,
and divide it with the next number, you will
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get a value of 0.618.
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If you divide any number with every other
number on this sequence, you will get the
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value of 0.382.
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And if you divide any number with 3rd number
next to it, you will get a value of 0.236.
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Furthermore, if you divide 1 and 2, you will
get a value of聽0.5.
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You probably noticed that these are the same
numbers you will find on a fibonacci tool.
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On many charting platforms, these numbers
are turned into percentages. So the聽0.382
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becomes 38.2 percent. 0.618 becomes 61.8 percent,
and so on.
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These fibonacci numbers are found almost everywhere
in the nature. From the shape of the galaxy
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to the number of petals on a flower. Since
the fibonacci is found almost everywhere in
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the nature, many traders believe that fibonacci
can also be applied in trading.
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So, people started applying聽the fibonacci
tool when the charting platforms provided.
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It is widely believed, that since price doesn't
go in the straight line in one direction,聽when
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the price is in a trend, the price will retrace
at the fibonacci level,聽hence the name fibonacci
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retracement tool.
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So in an uptrend, if you take the聽fibonacci
tool from the swing low to the swing high,
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it is said that the price has a higher probability
of reversing near the fibonacci levels. Some
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traders like to give higher聽importance to
the 50, 61.8 and 38.2 levels.
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Now here's a big problem, unlike other indicators
who actually take real market data to calculate
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their values, fibonacci draws levels that
have almost no relation to the actual market
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data. Many fibonacci fan boys will buy stock
or a forex pair because the number of petals
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on a flower or the shape of the snail's shell
is based on the fibonacci.
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For example, the V聽WAP tool that I have recommended
many times on this channel, takes the real
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volume traded on a stock to calculate it's
value, fibonacci doesn't do anything similar
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to that.
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One might say, that fibonacci does take market
data like聽the swing low and swing high into
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consideration. Well yes, but that's actually
a problem.
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You see fibonacci numbers have almost no real
useful聽value in Trading. It has great importance
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outside of the financial markets.聽The only
reason why fibonacci works, is because people
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believe it works. If enough people believe
that the 50 percent retracement level works
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as a reversal point, many people will enter
trade near that level, which will make the
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price go in the desired direction.
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The reason why normal strong聽support and
resistance levels work so great, is because
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almost everyone is going to see them at the
same price.
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But in trading where every trader looks at
the聽swing low and swing high differently,
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the fibonacci value is not going to be at
the exact same level. Furthermore, fibonacci
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has so many levels that some traders can get
confused about which level is giving the real
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reversal sign, in other words, from what level
is the price reacting. This makes fibonacci
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trading really inefficient when compared to
other trading tools like the V聽WAP indicator.
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Furthermore, backtesting the fibonacci tool
can be really difficult because fibonacci
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requires you to draw from the swing low to
the swing high and vice versa. When you try
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to backtest, this swing low and swing high
will become very biased.
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In the other trading strategies I have tested
100 times on the Trading Rush channel, I took
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trades by looking at the indicators and not
the price itself, and since non repainting
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indicators look exactly the same on liive
markets and while backtesting, the backtesting
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data was unbiased.
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Now, one can recommend using the zig zag indicator
while backtesting the fibonacci levels. This
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way, you won't have to think about the swing
low and swing high while backtesting. And
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That's what I did. Since many traders believe
that most of the time price retraces near
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the 50 fibonacci level,聽I tested the fibonacci
trading strategy 100 times to find the truth.
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Although the聽zig zag indicator was able to
show proper swing lows and swing highs most
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of the time, it is not a perfect indicator.
Some swing lows and swing highs according
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to the zig zag indicator were not accurate,
but since swings of a trend can differ from
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trader to trader, this small number of less
accurate swings were fine. And when the zig
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zag lines were looking like a mess, no swings
of a trend were considered while backtesting.
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Since price does not react at the fibonacci
levels exactly, I only considered a fibonacci
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level if price had reversed near it. By near
I mean, if price reversed聽from 5 percent
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above or 5 percent below it.
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Since fibonacci is mostly聽used in a trending
market, I used the 200 period moving average
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to find the trend. When most part of the swing
low and swing high was on the one side of
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the moving average, I consider聽the fibonacci
level. Furthermore, in an uptrend, the swing
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high has to be higher than the previous swing
high. Similarly in a downtrend, the swing
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low has to be lower than the previous swing
low.
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So after backtesting the fibonacci tool 100
times, here's what I found out. Only 6 percent
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of the time price reacted near聽the 23.6 level.
18 percent of the time near聽the 38.2 level.
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14 percent of the time near the 50 level.
15 percent of the time near the 61.8 level.
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14 percent of the time near the 78.6 level.
And 33 percent of the time price either reacted
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from the 100 level or went straight through
all the fibonacci levels. That make sense
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since price is in a range most of the time,
but one thing to consider from this data,
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is that except from the 23.6聽level, price
reacted from all other levels the same way.
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That is not a good thing. In an uptrend,聽since
the price is going to reverse with a higher
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swing low anyway, and since there is no significant
difference between the levels, one can say
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that the fibonacci levels hold almost no significant
value in trading, especially when compared
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with other things like normal support and
resistance.
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The only reason people think聽fibonacci works
in trading, is because they believe it works.
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One can argue that this data was not enough
to be judged on. Maybe, but after testing
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many different trading strategies 100 times
on the Trading Rush channel, and taking virtual
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trades 10000 times to see how close are we
to the actual win rates, we have seen that
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the strategies that actually聽perform good,
give very good profit numbers after backtesting
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only 100 times. For example, popular聽trading
strategies like the MACD, Ichimoku cloud,
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bollinger bands,聽that are trusted and used
by many professional traders, gave very good
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win rates after we backtested them 100 times.
It will take many months to take 100 trades
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for many traders in liive markets anyway.
The question is, will you keep using a strategy
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that doesn't make profit even after multiple
months, when there are strategies that have
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the potential聽to make聽almost 50 percent
in the same time period. Most probably won't
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use a strategy that keeps them in a loss in
the long term.
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If you want to see the聽best trading strategies
that performed really well, you should check
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out other trading videos on the Trading Rush
channel.
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That's all. Now you know a little bit more
about fibonacci trading. Like the video if
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you liked it. Subscribe to the Trading Rush
channel and ring that notification bell to
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see more trading strategies tested 100 times.
Check out聽the Trading Rush app using the
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link in the description. Maybe consider supporting
the channel on Patreon. Thanks a lot.
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