Stock Market Trading Patterns 1 - Fibonacci.

Hello all!

Yesterday I read a little about stock market trading patterns.  That is, trading patterns that are reported to be able to give you an indication when it is a good time to get into or out of the market whilst minimising the impact on your funds.

The first thing I read about was "voodoo" techniques, so called because they're things like praying, astrology, and other seemingly unassociated practices to give you an edge in the market.  One that does seem to have some merit, was Fibonacci numbers.  Fibonacci sequence, is amazing in the fact that one number is approximately 1.618 times bigger than the previous 
number, and that ratio is known and Phi, the golden ratio.  Now this ratio, Phi is what some traders look for retracements where the price goes up to X then to Y, and X/Y is Phi.

These numbers form a sequence and it seems that there are certain numbers such as 23.6%, 38.2%, 50% and 61.8% that seem to have significance for retracements, where a stock goes up in price, then retraces back to a particular percentage of the original price before the move.  These numbers come from the fact that a number in the fibonacci series is 1.618 times bigger than the previous one, and 0.618 times small than the next.  So, 61.8% is the approximate difference between a fibonacci number, and the previous number in the sequence.  38.2% is 1-0.618, and the 50% is the mean of the 61.8 and 38.2.

So, for a natural retracement, you may expect, a stock that starts at a value X, and moves to a Value Y, will have a retracement to a value of Y - (X * 38.2%) for a bull rally .  This pattern would indicate a natural retracement before a price rise.

For a 61.8% retracement, that is seen as a warning sign for a potential change in trend.

Many traders believe that these values somehow hold some sort of magic as to when to enter of exist the market, hence the name "voodoo".  However, when you look into Fibonacci's series of numbers, all sorts of phenomena may be explained away using Fibonacci numbers, such as sea shells and the like.  So, on that basis, why not the stock market?

Interesting theory, and something worth knowing, but I suspect digging a little deeper may be required to see how solid this is as an indicator for buying and selling shares.