Thursday, November 24, 2011

Basic Fibonacci Trading.


by : Neal Hughes (FibMaster) http://www.fibmaster.com
Thank you for requesting our my email lessons on Fibonacci trading.
These lessons are appropriate for FOREX, Futures, Stocks, Minis, every
liquid market instrument.

I am a trader with over 20 years of experience trading the markets. Over the
years I have has developed an entire trading methodology based on
Fibonacci Analysis. In this series of free lessons, I highlight some of the
techniques I have developed from my trading career.
I wrote these lessons to demystify Fibonacci trading. When you finish these
lessons you should be able to apply the Fib techniques to real world
markets and understand their meaning to you the investor/trader.
Fibonacci techniques are powerful, but they do require some study and
practice. These lessons cover the basics to get you started. Once you have
mastered the basics, you may want to study my more advanced video
courses available here: Click here to order the advanced seminars.
Be sure that you read and fully understand each lesson before moving on to
the next one.
Table of contents:
Page 04 Lesson 1: Introduction
Page 06 Lesson 2: The .382 Fibonacci ratio.
Page 09 Lesson 3: The .618 Fibonacci ratio
Lesson 1: Introduction
Fibonacci is the basis of many trading methodologies, and many billions of
dollars are traded every year based on Fibonacci techniques.
We're not going to bore you with the history of Leonardo Pisan, Fibonacci,
but it is interesting. So, when you have the time, take a look at the following
link for some biographical info.
http://www-groups.dcs.st-and.ac.uk/~history/Mathematicians/Fibonacci.html
We do have to cover some ground before we can get to the charts.
Fibonacci is best remembered for his Fibonacci sequence, which is the
series of numbers where each number is the sum of the two preceding
numbers. 1, 1, 2, 3, 5, 8, 13, 21, 34, 55…
What we are interested in is the ratio between these numbers: 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.... This can start to look complicated, but it really isn't.
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. Fibonacci numbers and ratios appear in ancient buildings, in
plants, planets, molecules, the dimensions of human bodies, and of course
rabbit populations.
But of what use is all that to the intrepid trader?
Traders usually study charts! Fibonacci ratios may be applied to the Price
scale and also to the time scale of charts. Neal applies his Fibonacci
analysis to the price scale, so his focus here will be on the price scale.
Remember, prices never move in a straight line. When you look at any chart
you will easily see the ebb and flow of a stock as its’ price advances and
retraces. Stocks, Futures, Forex, Indices, 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
so close as to be truly amazing!
These Fibonacci price-points can be calculated in advance, giving us the
opportunity to predict possible market turning points. When the price
reaches these predicted areas, we can watch for a profitable trade if the
market behaves as we expect it to.
There are many out there who seem determined to make Fibonacci as
complex as possible, enveloping it mystery and secrecy, offering complex
mathematical formulas, etc. Neal does just the opposite. He strips away all
the hocus-pocus that surrounds Fibonacci analysis and shows you what is
truly important.
Neal believes in keeping it simple, and has gone to great lengths to make
Fibonacci trading easily understandable. His "Introduction to Fibonacci
Trading" video seminar is easy to understand, and shows you how
Fibonacci techniques are applied to actual charts. If you're interested in
trading with Fibonacci, this video is the place to start. Download it to your
computer today: Click here to order the seminar.
Neal Hughes uses Fibonacci ratios with a few simple indicators to help
determine probable price turning points, optimum entry, exit and stop-loss
levels. His complete techniques are available in on-line video seminars, inperson
seminars. For more details, see the following web page: Click for
details
OK, that’s it for Neal’s short introduction. Next time he will jump into some
charts and show you just how amazing Fibonacci analysis is and how you,
as a trader, can profit from it.
Lesson 2: The .382 Fibonacci ratio.
This is the second of our free email lessons on Fibonacci trading, by Neal
Hughes, (FibMaster), at http://www.fibmaster.com. Neal is a trader with over
20 years of experience trading the markets. He has developed an entire
trading methodology based on Fibonacci Analysis. In this series of free
lessons, he highlights some of the techniques he has developed from his
successful trading career.
In the last lesson, Neal talked about the many Fibonacci ratios. In this
lesson he will focus on the .382 ratio and what it means to you as a trader.
Let’s look at Microsoft weekly chart. 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.
Most charting software packages include Fibonacci ratios, but you should
know how to calculate them yourself.
Here’s how you calculate the Fibonacci ratio. You multiply the down move of
$29.78 by the .382 Fibonacci ratio which equals $11.37. So 38.2% of
$29.78 is $11.37. Now add that $11.37 to the current low of $30.20 and you
get $41.57.
In other words, if MSFT were to rally 38.2% of the down-move it would
reach $41.57 ($11.37+$30.20). (We are using rounded numbers in these
calculations). The chart above calculates it to be $41.564. We don't need
that degree of accuracy!
Move forward in time and see what happens. Several weeks later, MSFT
rallied and resisted right at that .382 Fibonacci level !!
What does this mean to you, the trader? It means you will know ahead of
time there will be probable resistance at that $41.57 level.
To review, the steps involved are:
1) Calculate the total value of a significant price-move (high to low, or viceversa).
2) Calculate a Fibonacci retracement (in this case .382) of the prior move.
3) Look for price to confirm, by resisting (or support in an up-move) near
that predicted retracement area.
There are many ways to trade this chart, and we will get to that in future
lessons.
Neal believes in keeping it simple, and has gone to great lengths to make
Fibonacci trading easily understandable. His "Introduction to Fibonacci
Trading" video seminar is easy to understand, and shows you how
Fibonacci techniques are applied to actual charts. If you're interested in
trading with Fibonacci, this video is the place to start. Download it to your
computer today: Click to order seminar.
Neal Hughes uses Fibonacci ratios with a few simple indicators to help
determine probable price turning points, optimum entry, exit and stop-loss
levels. His complete techniques are available in on-line video seminars, inperson
seminars, and via his real-time on-line chat facility. For more details,
see the following web page: Click for details.
In the next lesson Neal will focus on another important Fibonacci
retracement level, the .618.
Lesson 3: The .618 Fibonacci ratio
This is the third of our free email lessons on Fibonacci trading, by Neal
Hughes, (FibMaster), at http://www.fibmaster.com. Neal is a professional
trader with over 20 years of experience trading the markets. He has
developed an entire trading methodology based on Fibonacci Analysis. In
this series of free lessons, he highlights some of the techniques he has
developed from his successful trading career.
In the last lesson Neal focused on the .382 Fibonacci ratio. In this lesson he
will look at the .618 ratio. Let’s look at Microsoft daily chart.
There was a high in July 2000 of $41.44 and a subsequent low in October
2000 of $24.22, a down move of $17.22.
Here’s the math: multiply the down move of $17.22 by the Fibonacci ratio of
.618 and you get $10.64. Now add that $10.64 to the low of $24.22 and you
get $34.86. (Again, most charting packages do these calculations for you).
In November, Microsoft resisted right at that level !! Pretty amazing, eh?
So you now know two of the Fib levels Neal Hughes considers important:
the .382 and the .618. But beware, you shouldn’t blindly enter the market at
these Fibonacci levels.
For example, look back on this chart and notice how the market behaved at
the .382 level (30.80 area). Initially the market spiked through the .382 level,
then fell back to it (late October). We cannot expect a chart to retrace at
every Fib level, but we can expect some support/resistance as
buyers/sellers enter the market at these levels. Also, 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.
It is those higher-probability trades that Neal Hughes is interested in and will
cover in his future lessons.
Important notes from this lesson:
1) There are several Fib levels.
2) It takes some skill to determine which Fib level is likely to cause the
market to turn.
3) There are some techniques to help you determine where a market is
more likely to turn.
4) Do not blindly anticipate a market turn at a Fib level.
There are many ways to trade this chart, and we will get to that in future
lessons.
Neal believes in keeping it simple, and has gone to great lengths to make
Fibonacci trading easily understandable. His "Introduction to Fibonacci
Trading" video seminar is easy to understand, and shows you how
Fibonacci techniques are applied to actual charts. If you're interested in
trading with Fibonacci, this video is the place to start. Download it to your
computer today: Click to order seminar.
Neal Hughes uses Fibonacci ratios with a few simple indicators to help
determine probable price turning points, optimum entry, exit and stop-loss
levels. His complete techniques are available in on-line video seminars, inperson
seminars, and via his real-time on-line chat facility. For more details,
see the following web page: Click for details.

This is a tutorial about a Fibonacci Extension method that can be used to set very precise take profit levels and to determine Support and Resistance levels.
In this tutorial I use screen shots from VT trader. It is free to use with a demo account. The grey screenshots are from Tradestation.
The setup in popular charting tools like Tradestation or e-signal is very similar.
As an alternative you can download my MS Excel based Fibonacci Calculator http://www.aergo.ch/download/webFIBOcalc-v2.zip and use a free chart at www.netdania.com
My preferred timeframe for this method is the 1h chart, but it is working on any timeframe.
Step by Step Tutorial
To use Fibonacci you must know the High, Low and the retracement depth of a swing.
Sequence in a Upswing: Low -> High -> Retracement
Sequence in a Downswing: High -> Low -> Retracement
The next screenshots shows what we are looking for.

Important: Highs and Lows ARE ALWAYS the peaks, for retracements you can choice if you take the peak or the candle body as the reference.
To draw the Fibonacci lines press the button left to the arrow. Then click on a Swing High, hold the left-mouse button, move the cursor to the low and release the mouse-button.
After that double click on a Fibo line to open the properties and enter the values from the next screenshot. Set it as default to have it in all charts.
The rule & Levels
Based on the depth of the retracement I set my Take profit levels on the related Extension level.
Retracement Level Take Profit Extension
61.8% 176.4%
50 or 38.2% 161.8%
26.4% 127.2%
The 233% Extension is strong level as well, that’s why I always include it into my charts.
Example: If the price retraces to the 61.8% Level I set my main Take Profit level near the 176.4% Extension (a little bit below in an Upswing and a bit above in a Downswing).
In the above example the retracement low-peak was at the 50% level but the candle closed above the 61.8% level. In this case you can choice if you now place your take profit Levels at the 176.4% or the 161.8% level.
Lets take a look into the following swing.
Retracement to the 38.2% Swing = Master Extension level = 161.8% but it is always a good idea to take part profits on the 127.2% level.
For a Downswing you have to draw the Fibo from Low to High.

Another downswing example in Tradestation:
Clustering the Fibos
You properly noted that the Extensions are often acting as Support and Resistance levels for further price action.
A cluster appears when multiple extensions and/or retracement levels from other swings are near each other, these levels are heavy barriers.
I hope you liked this tutorial, further examples are included in the manual which comes with our Excel based Fibonacci Calculator downloadable here: http://www.aergo.ch/download/webFIBOcalc-v2.zip
Author: Dave @ aergo.ch