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Fibonacci Trader Interview
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Leonardo Pisano (nickname
Fibonacci) was a mathematician, born in 1170, in Pisa
(now Italy). His father was Guilielmo, of the Bonacci
family. His father was a diplomat, as a result Fibonacci
was educated in North Africa, where he learned
"accounting" and "mathematics".
Fibonacci also
contributed to the science of numbers, and introduced
the "Fibonacci sequence"
The Fibonacci sequence is
the sequence 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144,
introduced in his work "Liber abaci" in a problem
involving the growth of a population of rabbits. Aside
from this sequence of number where every next number is
the sum of the proceeding two, 0, 1 (0+1), 2 (1+1), 3
(2+1), 5 (3+2), 8 (5+3), 13 (8+5), etc.
There are
the "Fibonacci ratios".. By comparing the relationship
between each number, and each alternate number, and even
each number to the one four places to the right, we
arrive at some fairly consistent ratios.. The important
ones are .236, 50, .382, .618, .764, 1.382, 1.618,
2.618, 4.236, and for good measure we include 1.00 ..
It turns out
that the ratios are mathematical principles prevalent in
nature around us, and is also in man-made objects. There
are many interesting, entertaining, and poetic
observations about Fibonacci numbers and ratios in the
universe (see the reference section below). Fibonacci
numbers appear in ancient buildings, in plants, planets,
molecules, the dimensions of human bodies, and of course
snails… But of what use is all that to the lowly trader?
What
really interests you, the application of Fibonacci
techniques in the trading environment..
Traders
usually study charts! Fibonacci ratios may be applied to
the Price scale, and also to the time scale of charts. I
study the price scale. My focus here will be on the
price scale for now, perhaps in the future I'll add some
time-scale studies.
Prices never
move in a straight line. Look at any chart, you will see
many wiggles, as price advances and retraces.. Stocks,
Futures, Forex, all instruments which are liquid, will
often retrace in Fibonacci proportions, and advance in
Fibonacci proportions. Not always, and not precisely to
the penny. But very often, and reasonably close! This
happens often enough that profitable trades can result.
I will show you some examples below.
I used
Fibonacci ratios with a few simple indicators to help
determine probable price turning points, optimum entry,
exit and stop-loss levels. My complete techniques are
available in on-line video seminars, in-person seminars,
and via my real-time on-line chat facility. For more
details, see the following web page:
http://www.FibonacciProfits.com/NealsInterview.htm
The
application of Fibonacci to trading can be very complex,
and take much time and experience to perfect. Many
traders enjoy making the process as difficult and as
complex as they can tolerate.. I do the opposite, I try
to simplify, try to bring clarity.
Fibonacci
example - Microsoft Weekly chart
This lesson demonstrates a very basic way to use
Fibonacci levels. You just read about Fibonacci ratios.
We will use just one of those ratios for now, the .382
Fibonacci ratio. In this chart MSFT made a high of
(approximately) $59.97 in December of 1999. After that,
it moved down to make a low of $30.19 in May of 2000.
The down
move was $29.78 (59.97-30.19), quite a substantial
amount.
Projecting
from that low in May, and using a Fibonacci ratio, we
can calculate 29.78*.382=$11.37 . So 38.2% of 29.78 is
11.37 . If MSFT were to rally 38.2% of the down-move it
would reach $41.57 (11.37+30.20). I'm using rounded
numbers in my calculations, the chart above calculates
it to be $41.564, we don't need that degree of accuracy!
Several
weeks later, MSFT rallied and resisted right near that
.382 Fibonacci level !!
So we were
able to predict a future probable turning point (after
the low of May 2000), using the Fibonacci ratio of
.382!! If only it were always so easy.
The steps
involved are:
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Calculate
the total value of a significant price-move (high to
low, or vice-versa).
Calculate
a Fibonacci retracement (in this case .382) of the
prior move.
Look for
price to confirm, by resisting (or support in an
up-move) near that predicted retracement area.
Fibonacci
example - Microsoft Daily chart
This chart
shows how a different Fibonacci level (61.8%) predicted
resistance and a market turn.
Notice how
the market behaved at the .382 level (30.80 area).
Initially the market spiked through, then fell back to
that level (late October). We cannot expect a chart to
retrace at every Fib level. We can expect some
support/resistance as buyers/sellers enter the market at
these levels, but we can't always predict whether the
market will actually turn at any particular level.
Fibonacci techniques are used to alert you to a possible
trade, if that price level does cause support or
resistance. These techniques are not used as a trigger
for entry. Other indicators are used in conjunction with
Fibonacci studies to provide higher-probability
entries..
As mentioned
before, there are several Fib levels, .236, 50, .382,
.618, .764, 1.382, 1.618, 2.618, 4.236, and 1.00 .. So
there are several places to look for a market turn. They
can be calculated in advance, but trading blindly at a
fib level can be dangerous, because you never know for
certain (in advance) whether the market will turn at any
particular Fib level. I use other indicators to help
overcome that problem,
click here
to learn how to determine which Fib ratio is likely
to be strong enough to turn the market.
Important
notes from this lesson:
-
There are
several Fib levels.
It takes
some skill to determine which Fib level is likely to
cause the market to turn.
There are
some techniques to help you determine where a market
is more likely to turn.
Do not
blindly anticipate a market turn at a Fib level.
More
Fibonacci examples
QQQ Weekly
chart with a deep retracement to .618 and a weak attempt
to rally after that. However, consider the daily chart
and intraday traders. they would have enjoyed the rally
from $75 to $100, after going long from a support level
that could have been predicted in March!
QQQ daily
chart. Multiple Fib levels timing the market perfectly
in 3 consecutive waves up!
Intraday
chart, QQQ 30-minute. Notice the two market Fib
retracements (there are others in this chart too).. The
rally from 29.26 stopped at 31.10, then it supported
**twice** at 30.39, for two good scalps. The next
highlighted Fib support is at a retracement of .618 from
the move up 30.47 to 32.49 .. Both of these support
levels were predictable before the market supported
there.. Hint:--- See how the rally continued after the
shallow retracement to 30.39 ... See how the rally after
the deeper retracement to .618 near 31.25 was a weaker
rally.. This is common, a deeper retracement often
foretells a weaker rally... See the next lesson in the
table of contents for more on these advanced Fibonacci
trading principles.
Another
intraday chart, S&P 5-minute.. The first Fib retracement
is on a bearish move, an opportunity to short. The
second is bullish, with a long entry near 999.25 .. Note
that popular charting software will calculate Fibonacci
to rediculous precision, we don't need anything closer
than one tick! Actually, you should allow some room
don't expect precision every time. Allow the trade some
room to develop, or you will be stopped out too often.
More Advanced - Microsoft Daily chart.
By now
you're probably quite interested, perhaps applying all
those Fibonacci ratios to many charts.. You should
experiment with your own charts. As long as the
instrument traded has a lot of liquidity (not a penny
stock for example), you should start to see Fib support
and resistance at work. You will start to notice that
Fibonacci levels "work" sometimes and not others.
Sometimes the trades are not profitable, or are less
profitable than others. You need to develop the skills
required to select better trades.
In this
mini-lesson I want to show you how to evaluate price
action based on which Fib levels it responds to, and how
the market behaves immediately preceding the Fib
support/resistance.
The chart
below actually has many Fibonacci levels "performing
well", providing support or resistance to the market. I
want you to focus on the two that I have identified, for
the purposes of this lesson.
The first
up-move that I have identified topped out at $26.90, and
then retraced 61.8% before supporting at that Fib level.
There was a pause at the .382 level, but it was not
sufficient to hold the market. Now look at the rally
from the support level near .618, it rallied but did not
exceed the prior high of 26.90 … As a general rule, a
retracement to .618 or below indicates that the
preceding up-move is losing steam. A shallow retracement
which supports at .382 is more likely to rally beyond
the prior high than one which has a deep retracement
beyond .50 all the way to .618 ..
The
impressive thrust from 22.55 up to 26.90 was negated by
a quick move back to .618 at about 24.20, so a trader
should not be too optimistic about a continuation of the
initial up-thrust.
Similarly,
the move up in June, from 23.50 to almost 26.50 would
also not inspire much optimism for a huge rally above
the high of 26.50 … In general a shallow support at .382
would indicate a probable rally beyond the prior high.
However, if the up-move preceding the retracement was
sluggish rather than thrusting, you also should temper
your enthusiasm.
If the
second rally which only retraced to .382 had the thrust
of the first rally, it would be a more attractive trade!
These are
not firm rules, instead they are used as a guide, to
help you filter for better trades. Every Fib level is
not equal, some are more attractive than others.
Important
notes from this lesson:
-
Not all
Fib levels are alike.
No
technical study is perfect, you must develop the
skills to filter out bad trades, and improve the odds
of finding better trades.
Price
action just before a Fib retracement can tell you
something about the future.
Which Fib
level causes the end of a retracement also can give a
hint to future price action.
No
technical study is perfect, you must develop the
skills to filter out bad trades, and improve the odds
of finding better trades.
You can
learn more about Neal and his video course by
clicking here...
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