Why The 50% Fibonacci Retracement Is Not Good For Trading Reversals

In my time trading I have read many articles and books which state the 50% Fibonacci retracement is the level in which the market has the highest probability of reversing at in the event of a retracement taking place, there are some reasons people give as to why the 50% level is so special in the market but you’ll see by the end of the article that these reasons are actually very flawed and have no substantial evidence to back them up.

First I’ll go through some of these reasons and give you my rational as to why I think they’re incorrect, then I’ll show you why looking for trading opportunities at the 50% level is more likely to result in you having unsuccessful trades than successful ones.

 

Why Do People Think The 50% Retracement Is Significant ?

 

I’m really not sure why people seem to think the 50% level is special when it comes to Fibonacci ratios ?

I read one article from a guy who runs another trading website ( which I’m not going to name ) who said “It is a widely accepted fact among chart technicians that most major moves, and many minor ones, will eventually retrace to around the 50% level of the move”

Now I don’t see how this makes sense at all ?

It’s clearly evident from one look at the charts that ‘major moves’ and ‘minor moves’ ( whatever they are ) do not eventually terminate at the 50% level, and in fact turn at many of the other retracement levels or turn in between the levels, so why has this guy got it into his head most major and minor moves will eventually end at the 50% level ?

I’ve already shown people in my Fibonacci article how the retracement levels have nothing to do with the reason why the market will turn upon it reaching a retracement level, therefore the 50% level along with all of the other levels are essentially useless and it’s understanding what the traders who are trading the pullback are thinking and in turn doing which will allow you to successfully trade the retracements themselves.

Another “fact” people point at to why the market turns at the 50% level is because it’s the halfway point of the previous swing.

I’m confused as to why this is supposed to be significant ?

So what if it’s the halfway point of the swing why does that make it more important ?

I can’t think of one reason as to why the market retracing to the halfway point of the swing is more significant than the market coming back to any of the other Fibonacci levels.

Some people will say the 50% fib has a high chance of causing a reversal as it’s monitored by a large number of forex traders, why it’s heavily monitored is for the same reasons I’ve talked about above, people falsely assume it’s a high probability level. The problem is how many people monitor a technical level has no bearing on the probability of the level resulting in a reversal.

In fact if a level is watched by many traders it will actually decrease the probability of level working out successfully because the banks will see there are a lot of people placing trades when the market hits the level in question and purposely take the market in the other direction in order to make these traders lose money.

 

The Problem With The 50% Level

 

To understand why the 50% level is not significant in the market I must show you how traders think and in turn act when they see a retracement taking place.

We are going to take a look at a few images now of retracements which terminate at each Fibonacci level, instead of using images of retracements which took place in the market, I’m going to use simple lines so you can clearly see how the traders beliefs on where the market is going to go will change depending on which retracement level the market is at.

When looking at each image I want you to think in your head as to which direction you believe the market has a higher probability of moving in.

image of 23.6% retracement

Here we have an image of a retracement which terminated at the 23.6% fibonacci level, from looking at this image which direction do you think the market has a higher probability of moving in ?

image of 38.4% retracement

Now here’s an image of a 38.4% retracement, do you think looking at this image the market has a higher chance of moving up or down ?

image of 50% retracement

Ahh now we come to the level in question, again which direction do you think the market is likely to move in ?

image of 61.8% retracement

Now we come to the first of the upper retracement levels, which direction ? Up or down from here ?

image of 76.4% retracement

And lastly we have the 76.4% retracement.

Although is not a level which comes as default when drawing a Fibonacci grid it is still an important level for easily identifying deep pull-backs in the market, so again where do you think the market is more likely to move in looking at the image above.

My answers to the images above are as follows…..

  1. Up
  2. Up
  3. Not Sure ?
  4. Down
  5. Down

I expect your answers to be pretty similar.

The reason I have shown you these images is to see for yourselves how retail traders think when a market begins retracing.

From the images you can see why the 50% level is not a high probability retracement level.

I couldn’t tell you if the market had a higher probability of moving up or down in the 50% image, I think if we were to do a survey in which we asked the traders reading this article to give us the direction they believed the market was likely to move in when looking at the 50% image its probable there would be an even split between the people who thought the market has a higher chance of moving down and those who thought the market had a higher chance of moving up.

This is to be expected, in the other images its far more apparent which direction the market looked like it was going to move in, but in the 50% image it’s very difficult to tell.

The 50% retracement archives something very similar to a consolidation.

In a consolidation some traders think the market is going to move down and some feel its going to move up, there is no clear consensus as to which direction the market has a higher probability of moving in, when a swing up occurs traders buy, and when a swing down happens traders short.

In a 50% situation people cannot decide which trades they should place, let say the market was rising and a 50% retracement occurs, a large number of traders will look at the fact the market has been moving higher and think what they’re looking at is a pullback, on the other hand there will be another group of traders who see the pullback as a reversal so what we end up with is some traders buying and some traders selling, therefore the chance of the level causing a reversal is basically 50/50 .

With the other retracement levels we know what the majority of the orders coming into the market will be, if the price comes into the upper levels like the 61.8% – 71.4% fib we know for a fact most of the orders coming into the market from retail traders will be sells, because they believe the market is falling lower.

Another thing is it’s also rather easy to figure out when the other types of retracements are likely occur in the market, with the 50% retracement it can be seen anywhere, at the beginning of trends – at the end of trends or in the middle of trends, there isn’t one point in a trending move where you can say the 50% retracement has a higher probability of appearing here than at another point.

With the other retracements we know where they are likely to occur because we understand why they occur in the first place, a deep pullback is likely to be seen when a trend reversal is happening because the banks want to get big positions placed in the direction of the reversal and a shallow pullback has a much higher chance of appearing late into a trending move because masses of traders are placing trades in the direction of the trend.

Figuring out when a 50% retracement is likely to appear is incredibly difficult as there is no easily identifiable reason as to why it should occur in the first place, all the other retracements have a reason as to why their more likely to appear in the trend whereas the 50% level does not.

The last point I want to make regarding the 50% retracement is even though it isn’t a high probability level for trading reversals it does still have a purpose in the market.

Any retracement no matter how big is significant because it changes what traders believe about the market direction, the 50% level is no different, a lot of orders will still be coming into the market as a result of a 50% retracement it’s just we cannot use the level for taking entries because the chance of the price moving higher or lower from the retracement is 50/50.

In reality it may not have a probability of 50/50 but because we can’t say for sure how many retail traders think the market is going to go up or down from the 50% level then it’s impossible for us to make a good judgement on the price direction, with all the other retracement levels we can know which direction the majority of retail traders believe the market is going to move in but with the 50% level we can’t because to some it will look like the price is going to go down whilst others will feel its going to move up.

 

Summary

Common advice surrounding events in the market typically tend to turn out to be incorrect, which is the case with the 50% level. As you can hopefully see from the article the reasons people give as to why the 50% level is a high probability level are actually non-existent, there simply pieces of advice which sound good on the surface but in theory don’t make sense as is the case with a lot of trading advice seen these days.

 

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