Where is the logic behind applying Fibonacci to trading?

[Danielbub]

Can someone please explain to me why Fibbonacci levels are used in technical analysis? Where is the logic behind assuming that price will respond to these 'magic' levels? Or do they just form a self fulfilling prophesy due to the vast number of people who watch out for them?

[DeenaLock]

There is no logic, and price don't "respond" to these levels, but people want to feel like they have some tool that somehow help them in their trading, so we have... fibonacci!

[DCaulfiel]

I don't agree with the last poster, when it comes to fibonacci, there are two groups of people, the first group thinks that it is just mumbo jumbo, those are the ones that will tell you fibonacci trading is just a self fulfiling prophesy, and the second group where I belong believes that fibonacci numbers are divine, the logic behind the first group resoning, is that there is no logic, they are close minded and only believe what they can touch and see. the second groups logic is that, fibonacci numbers are in everything in the universe, a leaf, the human body, it doesn't matter what it is, it's there! and the fact that price always reverse at a fibonacci level, I repeat ALL!, that must say something, it is not that all traders use fibonacci, we know they don't. these numbers are divine there is no other way to put it. ofcourse there are people that don't believe in divine things. but you can just check for your self.

[DeannaCymn]

I think the Fibonacci levels are an excellent tool, if used correctly. I use it for precise entries, but on pairs that I have already analyzed and are ready to trade anyway. For example, new traders, sometimes find out about this tool, and then proceed to place it on the charts, wherever and randomly. Once learned to use in conjunction with the technical analysis that fall in line with the fundamentals at the time, then place the Fib tool, and use for entry.
For example: If I missed an excellent set up for a double top trade, I will use the 61.8% or the 78.6% retracement (if happens) to enter. I still get into an axcellent trade, but at a little worse price. I find the SL though is usually smaller entering that way than right at the top of the double top.
NO - You most certainly cannot win every trade this way (of course) but when you get a runner the profits far outweigh what the losses would be.
So, to me, it's not a "magic" tool, but it certainly does help to pinpoint entries a lot more accuratly... In the correct scenari

[admin]

Who cares, as long as it works and it does. I don't believe in devine intervention but I know that institutional traders use them and that's good enough for me. I do believe they are self fulfilling prophecy because so many traders buy/sell at these levels and/or put stop loss behind them so fibonacci levels become support and resistence zones. Exactly the same as 200, 100 and 50 simple moving averages. There is no magic behind it, just buy and sell orders concentrated around those levels. If buyers win you see a bounce if sellers win you see price action going through fibonacci level as stop loss of long orders (sell orders) behind it get activated and price usually falls to the next fibonacci level, moving average or previous PA support/resistence zone. Fibonacci levels only give you potential demand/supply zones and potential profit targets (again demand/supply zones), nothing more, but with proper risk management and aligned fundamentals that's all you'll ever need to buy cheap, sell expensive more often then not.