In a recent article, we talked about the Fibonacci retracements. We saw where it comes from (hint: the Fibonacci sequence and its ratios), and we also saw how they are used in the markets. It’s one of the most popular indicators you can find out there. If you do some research, you’ll find a huge amount of articles and courses on how to use them appropriately.
It’s no secret that one who has mastered the use of the Fibonacci retracements stands to make a lot of money from it. It has happened in the past, as it one of the oldest strategies in the book, and will happen again. You could start making money from them really soon if you build or learn a strategy that relies on these very special levels.
In this article though, we will not talk strategies. We won’t discuss entering, managing or exiting trades using these magical numbers as retracements. We will however discuss the all-mighty “why”. Why does it work? How do these number keep coming back and fit perfectly to that little mold we fabricated for them?
Trading and the self-fulfilling prophecies
If there is one thing traders tend to forget about the markets, it’s that they are man-made. There isn’t some sort of mastermind holding the up or down buttons, hiding somewhere and making the decisions. The markets react, move and retract based on the decisions to buy, sell or stay away from millions of traders all around the world.
Being a man-made product has its ups and downs (pun intended), but one should never forget that one of the biggest tendencies of human beings is to try and make sense of things. We’ve always wanted to figure things out, whether it is in science, mathematics or psychology. Humans like to find out what makes things change, move and evolve – and the markets are no exception to that rule.
In the previously written article about the Fibonacci retracements, we briefly touched on the fact that we don’t really know why these numbers work. It’s true, we don’t quite know why they are so relevant, or rather we don’t know why they came to be so relevant.
The truth is that right now, at this very moment, millions of traders are currently looking at the market using “Fibonacci retracement goggles”. Why? To try to figure out the market and its movements, and to make money from it.
The impact is clear. Since everyone in the whole world is looking at these specific numbers, it’s no wonder the market is in turn affected by these numbers. Let’s say the EURUSD suddenly approaches the 61,8% level. The reaction of most traders (which means millions of people) will be to probably close part of their positions to lock in profits. Since millions of people are taking the decision to close their trades, the market reacts and slows down. Since the market slows down, the 61,8% level holds and the Fibonacci retracement strategy works for another day.
It’s easy to see how the man-made vision of the markets has affected its way of moving, and seeing this clearly should help you realize the enormous potential of trading the Fibonacci retracements.