Janamejay, there is a huge literature out there that shows how fibonacci series is used in the stock markets. It is used as technical analysis tool which is chart analysis and it provides you with levels at which the stock price will find support (when the price goes down it is likely to rebound from support upwards) or resistance (when the price goes up it will stop its rise in the resistance line).
They are not a self standing trading tool, they can only be used with other technical or fundamental analysis techniques.
Dear Janamejay,
I hope the enclosed book is helpful to answer your question.
Regards Reiner
Hello,
We may divide Fibonacci methods applied on financial markets into three groups:
a) Price techniques – Fibonacci retracement, dynamic Fibonacci retracement. There can also be found extension of classical Fibonacci techniques like: bat, crab and butterfly patterns.
b) Time techniques – time zones, Fischer's method, Carolan’s spiral calendar,
c) Price – time techniques – Fibonacci arcs
Fibonacci technique was also implemented in Ermanometry (three dimension spiral theory) and in Elliott wave theory and also in Plummer theory (alternative theory to Elliott Wave theory)
Best regards,
Chris
@Krzysztof Borowski
All those Fibonacci methods came to being centuries after the death of Fibonacci, though the Golden Section was familiar to architects centuries before Fibonacci was born and Mother Nature developed various structures and processes according to the principles of the Fibonacci ratios millions of years before those architects came to exist which is strongly suggestive that we deal with something very natural and common.
However, financial markets were created not by Mother Nature but by man and we need to ask ourselves what reservations need to be made about the applicability of the Fibonacci tools.
The irruption of the nonlinear led to a profound transformation of scientific and technical fields. Economics and markets do not escape this revolution. It should be stressed that raw Fibonacci tools do not ensure sustainable profits in trading liquid financial assets even medium term. The introduction of the concepts of deterministic chaos was indeed a true epistemological rupture.
I would like to make it very short indeed. Fibonacci methods cannot work properly in a multidimensional non-linear dynamics. Fibonacci extentions resemble chaotic fractal expansions but they are not. Fibonacci retracements resemble chaotic squeezing, but they are not. Price techniques is the domain of Dimension 1. Time technique is the domain of Dimension 1.
The logistic equation is also spread in a space of Dimension 1. A dynamical system spreading itself in a space of Dimension 1, which has a positive exponent > 0, cannot be "dissipative". They do not have any contracting neighborhood. You want to rely on Fibonacci retracements without dissipative forces. On what grounds?
Still the Fibonacci ratios lie at the foundations of the theory of chaos because they are uniquely linked to the Feigenbaum constants.
The Elliott theory of waves was a harbinger of fractals. It is based on the principle of a wave causet. However, the fractal trigger can occur even before the formation of an Elliott wave.
The so called harmonic analysis is heavily dependent on fuzzy logic which is the opposite of chaotic determinism. However, I believe that it is possible to improve it by applying chaotic tools.
Chaotic systems stem from Fibonacci ratios in principle. A minimum dimension of the flow necessary to allow contraction of trajectories (folding) and the SDIC (Sensitive Dependence on Initial Conditions) is a three-dimensional space. However, the new finding of mine uniquely relating the two Feigenbaum constants (F=4.669 and F(alpha)=2.5029) ensured that the resulting map can appear unidimensional and is thus much easier for studies of the dynamics behavior. I also found a formula uniquely relating F(alpha)=2.5029 to Pi (3.14) which pertains to shifting transformations (so far in chaos we did with stretching, squeezing and folding only).
In my opinion chaos theory, fractal theory are something different from Fibonacci methods. One should not confuse them or classified in the same group of strategies. Working as a stockbroker I made a following observations: the more liquid asset, the more Fibonacci methods come true. Thanks to Fibonacci methods we used to gain some money.
@Krzysztof Borowski
...the more liquid asset, the more Fibonacci methods come true...
Fibonacci ratios are limit numbers when n goes to infinity or is large. Fibonacci methods take into account nonlinearities, (that's the common thing with the chaos theory) and silently swallow an infinite source of behavior diversity not aspiring to better understand natural phenomena and phenomena considered as complex which were adverse to any modeling before. Certainly Fibonacci methods cannot be labeled under the name "non-linear signal processing" , they are not based on the Takens theorem. It is not possible to reproduce the essential features of of a system without a reconstructed phase space of a very low dimension. Fibonacci methods are some non-parametric analysis by means of the extraction of the time-series properties allowing the reconstruction of the dynamic relation which links the time-series terms. The non-parametric modeling of nonlinear processes does unfortunately not make it possible for a great number of processes to produce robust results. In front of this lack of specification about the complex or chaotic processes new tools have been developed. Your claim how or when Fibonacci works is not a statistical test in a strict sense. And it leaves the major issues of the Fibo methods unanswered. Still it is close to nature, whatever it means, perhaps a closest to nature tool available from brokers' sites. One needs to understand its serious limitations, though, before blindly applying it for making money. I am shure that a red light alert will appear very soon for a new practitioner of financial markets.
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