Fibonacci: You May Think You Know, But You Have No Idea

As I plan to share with you next week, I’m gravitating further and further away from believing fundamentals can drive prices in the near-to-intermediate term.

I’m relying more and more on my technical analysis. And it is paying off.

And that’s because technical analysis is the yard stick for consensus decision-making. Price action is, simply put, a manifestation of human nature.

Basically, I’ve concluded that anyone who thinks they have the market figured out (simply because they have the fundamentals figured out) has no idea.

Consider an excellent book I am re-reading …

The Wave Principle of Human Social Behavior and the New Science of Socionomics

The book was written by Robert Prechter and published in 1999. Allow me to paraphrase (and hopefully not botch) a few of the studies explained in the book:

Psychological study by a guy named Lefebvre at University of California asked subjects to choose between two options, of which they had no strong feelings.

Their responses could be divided into 62% and 38% Fibonacci proportions. [In other words: 62% of respondents chose one option and 38% of respondents chose the other option.]

They were also asked to sort indistinguishable objects into two piles. The piles were divided with 62% in one pile and 38% in the other.

When asked to evaluate friends on bipolar qualities, pole showed positive qualities 62% of time.

When asked what percentage of people take good moral versus bad moral actions, the study found – yep, you guessed it – a 62/38 breakdown of right versus wrong.

When non-Chinese people were asked to choose Chinese characters and then asked if those characters (which they know nothing about) were positive or negative, 62% were deemed positive and 38% negative.
This is really a good one …

Subjects were asked to move an object a certain distance. After doing so they were then blindfolded and asked to move the same object half the original distance they previously moved the object.

They move it, on average, to a spot 61.5% of the original distance.
What did the study authors conclude?

“The experiment demonstrated that the phenomenon of the golden section is related not to the primary processing of visual information, but rather to the work of the central processor operating with “generalized information.””
Basically, our brains are hard-wired with the golden mean … well, in mind.

I’m not one to disagree. These findings are consistent with all other natural growth findings in nature. And it really provides the intellectual basis for why Fibonacci levels and Elliott Wave analysis can be so effective.

It really is great stuff. If you want to track down the book, I recommend the section on “herding” – it is amazing.

It all effectively proves this game has little to do with external events (insofar as we often expect) and most to do with internal human social behavior.

Be sure to stay tuned — I plan to share more on my evolution and belief in Elliott Wave. In fact, I plan to offer all subscribers to BSFX a special report and comprehensive PowerPoint slides that detail every bit of my personal trading framework.

If you’re serious about trading FX (or any market for that matter), you don’t want to miss that offer.

  • Paul

    There is a revised edition (2013) of this book available in both paper and electronic formats. Just search for it on Amazon.

  • Stevie

    You find these ratios everywhere in nature, from the structure of flowers to humans. The ‘rule of thirds’ which is used in photography is basically fib levels.

    The human eye finds these levels pleasing. For instance a photo or painting with a ratio of 1:2, 1:1, 2:1 (fib levels) sky to land ratio makes for the best photo. I think traders in the past obeyed the ‘rule of thirds’ i.e fib levels without realising because these levels made the prettiest charts.

    Everywhere you look, and every aspect of this world contains Fibonacci.

  • Tom

    Ya, 38% of my pay check goes to the gov`t & 62% to my wife. Go figure

  • Darthfrancis

    On another note, news is just a tool that the market makers use to manipulate the martet to there bias. That’s why fundemental analysis is just speculting and therefore gambling. Price action is the truth the whole truth and nothing but the truth.

    On regards to FIBO, IF used properly it can really turn your equity curve around, turning that frown upside down. ;-)

    Cheers

    Darth

  • http://www.alleycat.be Jo D

    the wavenature of reality, you do know the gods will come down from the heavens and strike you with fire and lightning if you share that with the crawlers in the dirt, right ?