The Study of Fibonacci Patterns

The Study

There’s been a lot of work done on Fibonacci Patterns and although there has been some great work by some wonderful people, we decided to do our own study on a large number of trades and their potential results. I also wanted to shed some light on the aspects of the research we did and give some clarity to the study.

The “Rules” To Be Marked As “Successful”

We looked at approx 100,000 of the main patterns in the study. In order to mark a pattern as “successful” we looked for the following conditions:

1. These patterns were on a variety of different time frames (5M, 15M, 30M, 1H, 4H, D, M).

2. A reversal had to occur once price entered the PRZ, but not before price exceeded the furthest point of the PRZ. This would indicate a loss and not a successful pattern.

3. A successful reversal must reverse 15% from when price entered the PRZ to where it exited the PRZ. If it did not reverse 15% and stayed inside the PRZ, again this would be a failed pattern.

4. The patterns would not be filtered in any way, so no matter the size of the PRZ or the structure of the pattern, the pattern would be included in the study.

5. After a trade moves 15% we automatically move stops to preserve our capital. The breakeven trades are counted as successful for a few reasons: A) Any professional trader would agree that a free ride in the market without losing money is a success! B) With the way the forex brokers work, you get rebates based off the volume you trade. Thus because a trade is breakeven you probably still get a 1 pip rebate from your broker. If you don’t, I would consider finding one that would give you a rebate.

The Results

The results were on track with what we were expecting. Let’s talk about the patterns first and then the success rates associated with those patterns.

Gartley: This pattern had the highest NUMBER of patterns produced from the 100,000 pattern study. This is not really a surprise. The first “fibonacci pattern” discovered in the 30’s was the Gartley so it makes sense that it was the highest producing pattern if it’s the most common one to be found. However, the Gartley also had the lowest success rate.

Butterfly: The second most common pattern found in the market is the butterfly, with an 88.44% success rate (remember these numbers take into account breakeven trades).

Bat: This is one of my favorites just because of the small PRZ or Potential Reversal Zone). This of course is your window of opportunity to get into the trade. It’s a common pattern and is always a nice one to trade but just make sure the risk isn’t too big; some of these patterns based off their study have a large PRZ.

Crab: This is one of the most rare patterns and it’s amazing how few times a month they will show themselves. But you will also notice with a 90.89% success rate, it’s one of the few patterns that hit that 90% level.

One Important Question Left to Answer

One of the most popular questions we get after reading a study like this is: ‘What is the % of profitable trades where the trades hit their target?’

Easy answer: Anywhere between 70-75%. When we ran the numbers with targets in mind, the success rate with JUST the pattern alone (not using SONAR to bump up the statistics) gave us a 70-75% success rate. We were using the B point as our first target in that example.

What can you expect from a 70-75% win ratio?

The managed account we ran performed to around a 65% return by the end of the year and that was with a win ratio of 68.5%. So we actually did less than the 70-75% average. This is probably because December was a frustrating month with 19 losing trades in a row, however we still came up with a handsome profit. How? It all has to do with how much you risk. More on that another time, but until then, Happy Trading.

Ps. If you have any questions, I’m happy to answer them. Please post them in the comments below.

1. Gary

05/22/2012 10:33 pm

For condition #2, do you mean not AFTER price has exceeded the PRZ? And it it based on a closing price basis?

For condition #3, do you mean 15% from the highest harmonic level (for a bullish pattern)?

Thanks!

05/22/2012 11:11 pm

#2, Another way to say this would be that price will have to reverse before the pattern gets invalidated by price leaving the PRZ.
#3, It would be from the highest point price has reached.

Great questions ๐

3. Marc V.

09/08/2012 10:11 pm

Hi,

Using the managed account results as a benchmark, it appears you are saying most any of us following along can achieve AT LEAST a 65% return annually as well. But…where is leverage taken into account as spot forex cannot be played without it so you cant make a statement that you could with equities “65% RETURN WITHOUT ANY MARGIN OR LEVERAGE USED.” Since that doesnt apply to Spot Forex, and I suspect having a good margin strategy is a huge factor in total return in Spot Forex unlike even Futures where your margin and leverage is very limited compared to Spot Forex. So what “can” an aggressive but prudent trader expect as an annual return?

4. maggie

09/08/2012 11:25 pm

Hello Marc,

You do NOT need to use leverage when trading in the forex. In fact you can even use negative leverage. If you have a \$10,000USD trading account and you place 1 mini lot (with a contract size of \$10,000USD) then you are not using any leverage. You have put into the market the same amount that is in your account.

Using high leverage is what causes a lot of traders to fail. In fact most that use high leverage are just gambling because they do not understand what and how leverage can hurt or help you. Think of it this way. IF you have a lotto ticket you spent \$5 on, the expected reward is the \$30million dollar winning price, the chance of you winning is very low. But if your risking \$5 to make \$5 the chances of you winning are going to be far greater. If you have a \$1,000 trading account (which you are risking) and your wanting to make a living trading forex, I’m guessing your going to have to make at least the average middle class family and say 50,000USD. Taking 1,000 and turning it into 50,000USD where your risk is 50x that of your risk is highly unlikely.

To answer your question, if you use aggressive amounts of leverage your returns will probably be far less then 65%, without running the clacs, I’m willing to bet that you would probably lose money.

Hope that provides some insight ๐ Trade responsibly. This is something we go over with our members and show them how much leverage they can use before their returns decrease and how to manage leverage. Its like driving a car, you don’t always want to be racing down the street.

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