Chapter 1 – Introduction to
Fibonacci
·
Helps determine support and resistance areas.
·
Can identify extent of price movements.
·
It is predictive in nature and thus considered a
leading indicator
·
Should not be used on its own. Always combine
with other indicators.
·
Leonardo Pisano Bogollo, first discovered the
Fibanacci series in the 13th century.
·
Based on Golden Ratio.
0,1,1,2,3,5,8,13,21,34,55,89,144,233,377,610,987…
·
Fibonacci retracement ratios
o Used
to determine where the price may revert after a swing, facilitating a trade
entry.
|
Series |
c/d |
b/d |
a/d |
|
0 |
|||
|
(a) 1 |
|||
|
(b) 1 |
|||
|
(c) 2 |
|||
|
(d) 3 |
0.667 |
0.333 |
0.333 |
|
5 |
0.600 |
0.400 |
0.200 |
|
8 |
0.625 |
0.375 |
0.250 |
|
13 |
0.615 |
0.385 |
0.231 |
|
21 |
0.619 |
0.381 |
0.238 |
|
34 |
0.618 |
0.382 |
0.235 |
|
55 |
0.618 |
0.382 |
0.236 |
|
89 |
0.618 |
0.382 |
0.236 |
|
144 |
0.618 |
0.382 |
0.236 |
|
233 |
0.618 |
0.382 |
0.236 |
o Some levels are not derived
from Fib rations. Eg. 50% marker is more of a psychological impact on the
chart.
o Another
popular level is 78.6%, which is a square root of 0.618. It is the deepest
retracement level.
·
Fibonacci extension/expansion ratios
o Similar
to retracements. Help identify market exit points.
|
Series |
d/c |
d/b |
d/a |
|
0 |
|||
|
(a) 1 |
|||
|
(b) 1 |
|||
|
(c) 2 |
|||
|
(d) 3 |
1.500 |
3.000 |
3.000 |
|
5 |
1.667 |
2.500 |
5.000 |
|
8 |
1.600 |
2.667 |
4.000 |
|
13 |
1.625 |
2.600 |
4.333 |
|
21 |
1.615 |
2.625 |
4.200 |
|
34 |
1.619 |
2.615 |
4.250 |
|
55 |
1.618 |
2.619 |
4.231 |
|
89 |
1.618 |
2.618 |
4.238 |
|
144 |
1.618 |
2.618 |
4.235 |
|
233 |
1.618 |
2.618 |
4.236 |
|
377 |
1.618 |
2.618 |
4.236 |
o
Includes two unofficial levels: 100% and 200%
Chapter 2: The need to understand
and identify the trend correctly
·
Market trends – the key to successful trading
with Fibonacci is to trade in the direction of the overall trend.
·
Sideways market
o Statistics
show, market moves in a trend 30% of the time and is range-bound 70%.
·
Trend
o Upward
– higher-highs, higher-lows
o Downward
– lower highs, lower lows
o One
way to determine the direction of trend is to use 200 simple moving average
(SMA). The number SMA periods depends on the trader.
o The
author uses 20, 35, 50 Linear weighted MA (LMA)
§ If
20 LMA is above both 35 and 50 LMA and the 35 is in the middle, then the trend
is probably bullish.
o If
a timeframe shows turbulence, then switch to a longer timeframe.
Chapter 3: Fibonacci retracement
levels
·
4 essential steps to draw Fib retracements
o 1.
Identify if there is a clear market structure (big zigzag shapes)
o 2.
Identify overall trend (up or down)
o 3.
Determine recent major swing high and major swing low.
o 4.
Connect the two extreme points A & B
§ from
highest to lowest during downtrend
§ from
lowest to highest during uptrend
o Should
the price touch the retracement level?
§ the
retracement may be a little bit shallower or deeper than the exact Fib level.
o Using
Fib to define the strength of the market
§ A
shallow pullback often appears at 23.6 and 38.2 level. Often seen in highly
trending market.
·
Identifying and entry point
o Option
1 – aggressive trading – entering exactly at retracement level
o Option
2 – conservative trading – using confirmation signals/triggers along with
retracement level
·
Placing Stop loss
o 1.
Just below the retracement level – may get triggered if there is even a slight
volatility
o 2.
At the next percent Fib level. Little safer.
o 3.
Just below the 100% level. Gives more trade breathing room, but it may result
is higher losses.
Chapter 4: Fibonacci projection
levels
·
Closing a trade is more important than opening a
trade, in order to maximize the profit and minimize the loss.
·
Fibonacci expansion drawing steps
o 1.
Identify overall trend (up or down)
o 2.
Determine recent major swing high and major swing low.
o 3.
Connect the two extreme points A & B
§ from
highest to lowest during downtrend
§ from
lowest to highest during uptrend
o 4.
Hold the curser and drag the major high (in an upward trend) or major low (in a
downward trend) to the retracement point C.
·
Fibonacci extension drawing steps (no
point C needed)
o 1.
Identify overall trend (up or down)
o 2.
Determine recent major swing high and major swing low.
o 3.
Connect the two extreme points A & B
§ from
highest to lowest during downtrend
§ from
lowest to highest during uptrend
·
Expansions -> 3 points (A,B,C) to identify
the expansion levels
·
Extensions -> 2 points (A,B) to identify the
extension levels
Chapter 5: The power of Fibonacci
convergence
·
A convergence occurs when two or more Fib
retracements are drawn on more then one swing. Some levels from different retracements
may converge (percent levels at close proximity to each other)
·
Such levels/zones are stronger indicators of
support/resistance.
·
Can be combined with candlestick formations or
other indicators to get strong entry or exit levels.
Chapter 6: Ideal time to open a
position
·
The shallower (23.6% & 38.2%) the
retracements are, the stronger the overall trend.
·
Method 1: More Risk
o After
a retracement (shallow) C, place a trade after a breakout above B in the AB
swing high (or below B in a downtrend.
o Stop-loss:
just under 23.6% level (in an uptrend)
·
Method 2: Lower Risk
o Don’t
buy at the 1st break-out of AB swing after retracement C. Instead
wait for a re-test at B. Open trade when the price breaks-out previous-high
above B.
o Preferably,
a marubozu candle.
o Stop-loss:
Option1: Just under the marubozu candle. Option 2: just under the 23.6 level.
·
Lines or Zones? – the price may not exactly make
it to the breakout level. That’s why you should consider marking a support zone
instead of line in some cases.
Chapter 7: How to Optimize the
Trade Entry
·
Combining Fib retracement with other tools.
·
In a AB swing, after the retracement point C,
wait for another “confirmation signal” between C and B to open a position.
·
Confirmation Signals
o 1.
A trend line – eg. Price bouncing off of a trend-line
o 2.
Support/resistance levels – sometimes the Fib levels may coincide with prior
resistance/support levels. You can place a trade at these levels.
o 3.
Candlestick patterns – eg. A bullish engulfing candle bouncing off of 50% Fib
level
o 4.
Moving average – you can use, two MA crossovers, or price crossing one MA line,
or price bouncing off of a MA line.
Chapter 8: The Art of Exiting a
Trade
·
In trading, there are 3 crucial levels: entry,
stop-loss, & profit-taking.
·
Profit target is the most difficult.
·
3-part method
o Split
your holding into 3 levels
o Enter
at a retracement level
o Close
1st part at 127%
o Close
2nd part at 138%
o Close
3rd part at 161%
·
How to take profits
o 1.
A strong trend with a shallow retracement
§ A
target of at least 161.8% level should be considered
§ Partial
profit can be taken at this level
§ Next
part to be taken at 200% level and so on
o 2.
Mid-sized/deep retracement
§ Deep
retracement at 78.6% indicates that the trend lacks strength.
§ Choose
138.2% as profit target in this retracement scenario
§ Retracement
to 61.8% - golden ratio level
§ Target
161.8% level for profit
§ 50%
retracement – stick to 3 part-method.
Chapter 9: A Great Combination of
Fibonacci and Elliott Waves
·
Predictive tool and can give an idea of where
the markets may go.
·
Helps to identify dominant trend and the countertrend.
·
Move in the direction of trend is called impulsive
move, while those in the countertrend are referred to as corrective moves.
·
Rules for standard Elliott Wave cycle
·
Dominant trend (the motive phase)
o Wave
2 cannot retrace more than 100% of Wave 1
o Wave
3 isn’t the shortest among the five waves. In many cases wave 3 is the longest
o Wave
4 cannot enter the territory of Wave 1
o There
is often an extended wave among the three impulse ones.
·
Countertrend (the corrective phase)
o Wave
B does not go beyond the beginning of Wave A
o Wave
C exceeds the end of Wave A
·
Combining Fib extensions with Elliott Waves
o Length
of wave 5 can be predicted using the distance between start of Wave 1 and end
of Wave 3
o It
can be 61.8%(long wave 3) or 38.2%(not as long wave 3) depending of the length
of wave 3.
o Wave
5 may not be as long if wave 3 is extended.
Chapter 10: Secrets of Better
Trade Management
·
Money management and trading psychology account
for 90% of success in trading.
·
Learning to manage emotions is very important
·
Some effective ways to keep trading in track:
o 1.
Stop-losses and the 2% rule
§ Always
set a stop-loss for your trades
§ Risk
no more than 2% of your current trading capital in each trade
§ No
1 rule in trading is to preserve your capital. No 2 rule is “never forget rule No
1”
§ If
you want to risk more then 2%, split your capital into 80%/20% into two accounts.
You can use 20% account to take bigger risk.
o 2.
Raising the stop-loss order
§ Keep
moving your stop-loss level higher as the price move up.
§ When
you take a trade, place your stop-loss somewhere below the entry-point (in an
uptrend)
o 3.
Developing the habit of using a trading plan
§ “If
you fail to plan, you plan to fail” – Benjamin Franklin
§ A
trading plan is a specific set of rules and guidelines that cover every aspect
of your trading, including entry and exit, stop-loss, position size, risk
amount, risk/reward ratio, trade management, and trading psychology.
o 4.
Messages of Drawdown
§ Drawdown:
difference between the peak and trough during a certain period of your trading.
§ E.g.
if your trading account has $20K in it, and the balance falls to $18K before recovering
to $20K, the account experienced a 10% drawdown.
§ Normal
drawdown – natural function of ups and downs from unexpected market conditions or
small failures to follow your trading plan. Should be well managed to avoid
bigger than your tolerance.
§ Problematic
drawdown – when the losses hit your maximum tolerance, the first thing to do is
to get out of the fire. Stop trading when the drawdown hits 20% or above and
take a step back
·
Next step is to pin point the causes of
drawdown.
Chapter 11: Big Mistakes that may
Cost you a Lot of Money
·
Some mistakes to avoid when applying Fibonacci
o 1.
Expecting too much
§ Sometimes,
you can become so obsessed with a level, that you are unable to see other major
support/resistance levels.
§ You
should expect that Fib trading won’t work around 30-40% of the time.
o 2.
Using Fib for short-term moves
§ Short
timeframes (5m, 15m, 30m, or even 1h) makes retracement levels less reliable.
§ Applying
Fib in a longer timeframe (4h or more) is highly recommended.
o 3.
Inconsistency in the swing high and swing low used
§ Swing
high to low should be from shadow-to-shadow or body-to-body.
o 4.
Relying wholly on Fib tools
§ It
is advisable to combine Fib with other tools to enhance reliability of market
signals.
Chapter 12: Powerful Fibonacci
Tools in real Trades
·
Three examples of Gold daily, EUR/USD 4h,
USD/JPY 4h charts are illustrated.
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