FibMarkets.com

Neal Hughes is a trader (amongst other interesting pursuits), and can often be found posting his trades on the FibMarkets Trading Desk (Blog) under the pseudonym FibMaster, or reached via email at members@fibmarkets.com.  He teaches advanced Fibonacci tactics to locate highly probable and profitable trades.

Who knows?  We can’t be sure.

I use Fibonacci ratios to increase my odds in trading stocks.  They make my trading more profitable, and they make more of my trades winners.  For example, since November 1st, I have seven winners out of nine trades. I have three open trades right now, two of those are profitable (I’m optimistic about the third one too).   That would be nine winners out of twelve. I know Fibonacci ratios work, but the question is “WHY?”

Why can fibonacci numbers be found in nature? They are everywhere! Why are they found in art, in architecture and in music? Why are they found in the way plants grow, flower petals, seeds and pinecones, leaf formations? Your own body has Fibonacci numbers, (2 hands, 5 fingers each segmented into 3 parts), the size of fingers, limbs, facial features have Fibonacci relationships.

Take a look at this website for a quick exposure to Fibonacci in nature: http://www.ee.surrey.ac.uk/Personal/R.Knott/Fibonacci/fib.html.  It is a fun page, here is a quote from there “What have brick wall patterns, bee lines, seating people in a row and giving change got to do with a game with match sticks and with electrical resistance?   How do ways of crossing a river by stepping-stones relate to routing dirty water in treatment plants along its banks?  The link is the Fibonacci numbers of course!”

We don’t really know why Fibonacci numbers are found throughout nature.   But they are.   This is where my own theory about trading comes in. It does take a leap of faith, but I’m convinced that Fibonacci values appear in the inner workings of our brain as well as our physical bodies.   Here is my theory.

Each person has his or her own tolerance for risk and level of greed.  If a trade is losing value and the loss becomes unbearable, we close the trade and stop the pain. At that point we have reached our risk/pain tolerance. The same applies to profits.  In a winning trade, we eventually reach a point when we must close the trade, the profits are too great to be risked, so we lock in our profits when we reach our greed tolerance level.   My risk/greed tolerance is different from most other traders, and can also vary based many factors.

If we take a crowd of traders, say 50,000 of them, and get an average of their risk/greed tolerance, we would arrive a defined risk/greed tolerance value for that group.  We can only guess, but if we did the same for a different group of 50,000 traders we would probably arrive at a very similar average risk/greed tolerance value.   Because most traders are human, I suggest the average risk/greed tolerance level for any large group would be about the same as another group.

If we do the same for large groups of short-term traders, and then large groups of long-term traders we would have some valuable information about where these groups would translate their risk/greed tolerance into action.   Knowing where the short-term and long-term traders’ risk-greed tolerance coincides is very valuable. Where they coincide would be a profitable place to trade, since the market action would be more predictable.

That is exactly how I apply Fibonacci ratios to trading.

The markets tell us where the groups of traders have reached their risk/greed tolerance levels, these levels are reflected in the prices of trading instruments very clearly.  With that information we can calculate the probable future action of the traders.  This helps determine optimum entry points and profit objectives.

Why do Fibonacci ratios work?  Because we are human, part of nature, and because Fibonacci numbers are everywhere in nature.  No one knows for sure, but that is my theory.

What I do know is that a thorough study of Fibonacci techniques has made me a much better trader.

One warning, it is easy to find Fibonacci ratios in price charts, but knowing which ones are more likely to be profitable is not as easy.  Trading with only a basic understanding of Fibonacci techniques is dangerous.

-Neal Hughes “FibMaster”

P.S. Some skeptics say that Fibonacci ratios are no better than any other number set. I have an open challenge to anyone to try and predict future turning points reliably with non-Fibonacci ratios, since 1996 no-one has taken me up on this challenge yet.  If you have better ratios then Fibonacci ratios, send email to members@fibmarkets.com .  I do keep an open mind about these things.