The Fibonacci retracement tool is a popular trading strategy among traders, but is it really effective? While Fibonacci levels are found throughout nature, they have almost no real value in trading. Backtesting the Fibonacci tool can be difficult as swings of a trend can differ from trader to trader, and only a small percentage of the time did price react near the Fibonacci levels. Normal support and resistance levels hold more significant value in trading, and the only reason people believe Fibonacci works is because they believe it does.

Does Fibonacci Retracement Tool Work in Trading?

Introduction
Fibonacci retracement tool has gotten its name from a medieval mathematician, Leonardo Fibonacci, who introduced a sequence that can be seen almost everywhere in nature. The Fibonacci trading strategy, however, has been a controversial topic among traders. Some traders believe it works, while others consider it useless lines on a chart. In this article, we will try to answer the question of whether the Fibonacci retracement tool works in trading or not.

Understanding Fibonacci Retracement Tool
The Fibonacci sequence goes like this: 1+1=2, 2+1=3, 3+2=5, 5+3=8, and so forth. Each number is the sum of the two numbers before it. If you divide any number in the sequence with the next number, it will give you the value of 0.618. When you divide any number with every other number in the sequence, you will get the value of 0.382. Similarly, dividing any number with the third number next to it will give you a value of 0.236. And when you divide 1 and 2, you obtain a value of 0.5. These are the same numbers you will find on a Fibonacci retracement tool found on many charting platforms in percentage form.

How Fibonacci Retracement Tool Works in Trading
Since the Fibonacci sequence is found almost everywhere in nature, some traders believe that it can be applied in trading. The Fibonacci retracement tool is used to determine the levels at which the market is likely to retrace before continuing in the direction of the trend. In an uptrend, traders use the Fibonacci tool from the swing low to the swing high, and in a downtrend, they use it from the swing high to the swing low. While some traders give more importance to the 50, 61.8, and 38.2 levels, others believe that all levels are essential.

Does Fibonacci Retracement Tool Work?
Unlike other indicators that use actual market data, the Fibonacci retracement tool draws levels that do not have any relation to the actual market data. The fact that Fibonacci levels do not have any real useful value in trading raises concerns about whether it works or not. In trading, where every trader looks at the swing low and swing high differently, the Fibonacci value is not going to be at the exact same level. Moreover, Fibonacci has so many levels that some traders can get confused about which level is giving the real reversal sign. This makes Fibonacci trading inefficient when compared to other trading tools like the V WAP indicator.

Backtesting the Fibonacci tool can also be complicated because it requires you to draw from the swing low to the swing high and vice versa. The swing low and swing high become very biased when backtesting, which makes the backtesting data unreliable. While one can recommend using the zig-zag indicator while backtesting the Fibonacci levels, it is not a perfect indicator. Some swing lows and swing highs according to the zig-zag indicator were not accurate, but this was not a significant issue since swings of a trend can differ from trader to trader.

After backtesting the Fibonacci tool 100 times, it was found that only 6 percent of the time, price reacted near the 23.6 level, 18 percent near the 38.2 level, 14 percent near the 50 level, 15 percent near the 61.8 level, 14 percent near the 78.6 level, and 33 percent of the time, price either reacted from the 100 level or went straight through all the Fibonacci levels. These results show that except for the 23.6 level, price reacted from all other levels the same way. This means that the Fibonacci levels hold almost no significant value in trading, especially when compared with other things like normal support and resistance. The only reason people think Fibonacci works in trading is because they believe it works.

Conclusion
The Fibonacci retracement tool has been a controversial topic among traders. While some traders believe it works, others consider it useless lines on a chart. After backtesting the Fibonacci tool, it was found that Fibonacci levels hold almost no significant value in trading, especially when compared with other things like normal support and resistance. Therefore, traders should consider Fibonacci levels with caution before relying on them as their primary decision-making tool in trading.