An alternative to Fibonacci levels

Hi,

I love the concept of having a set of lines on my charts that display potential support/resistance levels – BUT do they really work?

Well, lets have a quick test:

1st I’m going to take a look at the famous 61.8% level – price HAS to find support or resistance on this level and it HAS to hit it, I am not accepting turns where price nearly hits – price has to hit the level and reverse.

2nd I’ll test this over 2 years worth of data by hand – I could do more years but I don’t want to.

3rd I’ll create a new support level of 42% – This level has nothing to do with natural growth, Fibonacci etc It is an independent number plucked out of the air to see what we can deem from this test.

4th I will also test the 50% level too just for comparison.

Here’s the results:

61.8% & 50% Test

50% & 62,8% levels

42% Test

42% levels

Well as we can see from the results it is plain to see that Fibonacci levels aren’t all they’re cracked up to be!

For a start it is impossible to know exactly the level to start from – often these levels did not get a direct hit by starting a retracement from a high or low, often the swings after a high/low matched!

We can see that we could pick virtually any number between 10-90 and it’s likely to have a fairly decent success rate.

Saying all this though and if you check out my Fib/Gann levels page you’ll see that I do like to have lines on my charts to aid potential turning points – this I have decided is a partial flaw and it’s something that I’ll be looking to sort out and tweak in the years ahead.

I urge you to pick a random number and test it for yourself.

Now it’s no secret that I’m a great fan of W.D. Gann.  I’ve studied Gann a lot and it is my conclusion that there is no way on earth that Gann would NOT have known about the Fibonacci number sequence – Gann talks extensively about NATURAL LAW, for centuries Fibonacci and it’s application has been known, Gann would of studied that, yet he makes very little reference to it in his works and prefers to use his own support/resistance levels namely dividing swings into 8ths – he then applied this basis for his gann angles to.

You also cannot get away from the fact that many of today’s Fibonacci experts also use the 50% level – Gann used this extensively too! – the 50% level is not a Fib level!

Like anything you have to make up your mind on what suits you.

Hope it helps

THT

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3 Comments

  1. Very interesting observation… As you said any number can be made into a turning point, not just fibs. I trade using wolfe waves and trying to apply fibs to see if i can find any improvements to my trades

    Reply
    • Thanks for the comment John.

      Yes It’s been at the back of my mind to test it for a while. I’ve done extensive testing of Fibonacci levels for retracements and projections – sometimes they work and other times they miss – I have my own theory in that if markets are dynamic and not static then this is why you only see fibs work some of the time – the times when the “face” of the market is square on with a chart, the other times when it’s dynamic the chart can’t cope or represent the true face of the market.
      THT

      Reply
  2. Thanks for finally talking about >An alternative to Fibonacci
    levels | The HOVIS Trader <Liked it!

    Reply

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