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Retracements: Fibonacci for Trading is Fool’s Gold


Leonardo Pisano Fibonacci

Some traders mistakenly want the discount. They do not want to buy rising markets; instead they look for bargains or market retracements as a place to buy:

Consider this email sent Sunday December 14, 2003, from a TurtleTrader student:

In implementing the methodology, what do you do when the market gaps over your next unit entry and after a couple days has not retraced back to give you the entry. There is a good chance that some of that will happen tomorrow morning but only time will tell if we retrace or not.

You want to buy on strength and sell on market weakness. Waiting for a retracement is never a smart strategy. Richard Dennis gives some insight:

Certainly when you have a position with a profit, anytime the market goes up a reasonable amount – say a strong day’s work – after you’ve put on a position, it’s probably worth adding to that position. I wouldn’t want to wait for a retracement. That is everyone’s favorite technique – to buy something strong that retraces. I don’t see any justification in the statistics for that. When beans are at $8.00 and go to $9.00, if the choice is to buy them at $9.00 or buy them if they retrace to $8.80, I’d rather buy them at $9.00. They may never retrace to $8.80. Statistics would show that you make more money buying them and not waiting for a retracement.

Waiting for a retracement is simply another form of losers averaging losers.

Even worse than the basic error of waiting for a retracement are the people fixated on Fibonacci retracements. The Golden Mean will not help you determine entry and exit. The idea that you can use Fibonacci sequences to predict retracements is a favorite ruse of market gurus. It is the holiest of Holy Grails.

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