While there are many more Fibonacci retracement levels, the ones that you should use are as follows:
38.2%
By nature of the fact that we are looking for clusters for an entry point, the 38.2% will only be used for the long-term move. E.g. a 38.2% move for the longer term may cluster with the shorter term 50% or 61.8% level.
By nature of the fact that we are looking for clusters for an entry point, the 38.2% will only be used for the long-term move. E.g. a 38.2% move for the longer term may cluster with the shorter term 50% or 61.8% level.
50%
The buy zone – look to buy 50% pullbacks of the short term move when there is a cluster of support/resistance at the same level. Granted, 50% is not actually a Fib number to the best of my knowledge. However it works well and it works often. 50% represents the point of equilibrium between buyers and sellers within a trend.
The buy zone – look to buy 50% pullbacks of the short term move when there is a cluster of support/resistance at the same level. Granted, 50% is not actually a Fib number to the best of my knowledge. However it works well and it works often. 50% represents the point of equilibrium between buyers and sellers within a trend.
61.8%
The buy Zone – as with the 50% level, you should look to buy 61.8% pullbacks of the short term move but only when this level clusters with other support/resistance at the same point. 61.8% is known as ‘The Golden Ratio’ and is perhaps the most powerful of all Fib retracement levels.
The buy Zone – as with the 50% level, you should look to buy 61.8% pullbacks of the short term move but only when this level clusters with other support/resistance at the same point. 61.8% is known as ‘The Golden Ratio’ and is perhaps the most powerful of all Fib retracement levels.
78.6%
This level should not be used for entry. Rather your stop loss should be placed behind the short term 78.6% retracement level. The reason for this is that the further the price pulls back, the higher the probability that it is actually a reversal as compared to a retracement. Once the price pulls back over 78.6% there is a far higher probability that it will actually retrace the full 100%. Hence, a stop behind 78.6% protects your losses by having a slightly tighter stop that using the 100% level. This also results in a more favourable reward to risk ratio.
This level should not be used for entry. Rather your stop loss should be placed behind the short term 78.6% retracement level. The reason for this is that the further the price pulls back, the higher the probability that it is actually a reversal as compared to a retracement. Once the price pulls back over 78.6% there is a far higher probability that it will actually retrace the full 100%. Hence, a stop behind 78.6% protects your losses by having a slightly tighter stop that using the 100% level. This also results in a more favourable reward to risk ratio.
100%
This means that the full move has reversed. Use this for stops only in a situation where you would like a slightly wider stop than the 78.6% or where the 100% adds significantly to the probability of your trade. E.g. It is a major support level.
This means that the full move has reversed. Use this for stops only in a situation where you would like a slightly wider stop than the 78.6% or where the 100% adds significantly to the probability of your trade. E.g. It is a major support level.
Note that we do not use the 23.6% pullback, this is simply too small a pullback for a high probability entry point.
Trading Strategy
I use one minute charts on the mini Dow future (YM) as the short term trends are clearer but it does not really matter what you use. For example I trade the same strategy on Forex with 15m charts and regularly analyse daily charts across a range of markets using the same technique. Another reason I prefer the 1m chart on the Dow is that I predominantly trade the US open from 2:30pm GMT. While you may of course look at 2, 5 or 15 minute charts, the trends will be less clear and take longer to develop once the market opens. A 1m trend becomes clear very quickly and thus suits my timeframes.
I use one minute charts on the mini Dow future (YM) as the short term trends are clearer but it does not really matter what you use. For example I trade the same strategy on Forex with 15m charts and regularly analyse daily charts across a range of markets using the same technique. Another reason I prefer the 1m chart on the Dow is that I predominantly trade the US open from 2:30pm GMT. While you may of course look at 2, 5 or 15 minute charts, the trends will be less clear and take longer to develop once the market opens. A 1m trend becomes clear very quickly and thus suits my timeframes.
Entry
Enter at the precise point of the cluster i.e. as the price touches it. Not before and not after. Only ever trade with the direction of the overall trend.
Enter at the precise point of the cluster i.e. as the price touches it. Not before and not after. Only ever trade with the direction of the overall trend.
Your confirmation is the fact that you have a strong cluster within a strong trend. Do not wait for the price to turn around at this level, by then it is too late. If you wait for the price to do what you thought it would then you have missed the trade. We are using leading indicators here to predict the move in advance.
Stop
Your stop should be placed behind the 78.6% retracement level. More conservative traders could place their stop just behind the 100% level but do not have a stop any wider than this.
Your stop should be placed behind the 78.6% retracement level. More conservative traders could place their stop just behind the 100% level but do not have a stop any wider than this.
Target
Your target is the old high/low or the 0% retracement level. I.e., you expect the price to retest the extreme.
Your target is the old high/low or the 0% retracement level. I.e., you expect the price to retest the extreme.
A further profit target for those who prefer to scale out of trades is to use Fibonacci extension levels.
Improvements
Other technical factors to consider:
Trend Improvements
• Look for convergence and divergence between price action and indicators to assess trend strength
• Use trend following indicators such as the ADX or DMI
• Assess trends in multiple timeframes
• Look for convergence and divergence between price action and indicators to assess trend strength
• Use trend following indicators such as the ADX or DMI
• Assess trends in multiple timeframes
Cluster Improvements
• Look for proven price action support and resistance at the same levels i.e. price has tested and failed at that level before
• Pivot points – a topic for another article perhaps. In my opinion pivots are the most powerful, individual technical tool at our disposal. Find a pivot at the same point as your Fib cluster and you have a VERY high probability trade. This forms the basis of what I call my Precision Trading Strategy. It also happens far more often than you may think.
• Look for proven price action support and resistance at the same levels i.e. price has tested and failed at that level before
• Pivot points – a topic for another article perhaps. In my opinion pivots are the most powerful, individual technical tool at our disposal. Find a pivot at the same point as your Fib cluster and you have a VERY high probability trade. This forms the basis of what I call my Precision Trading Strategy. It also happens far more often than you may think.
There are various ways to improve upon the success of this strategy even further. There are thousands of technical tools out there and we can’t use them all but if you have something that is working for you, keep on using it. The Precision Trader philosophy is quite simple – ‘Have as many reasons as you possibly can for every single trade that you place’. The more reasons you have occurring all at the same time, the higher the probability of the trade been a success. At the end of the day that is all you need… the confidence in your strategy that you have more chance of winning than losing. And of course the ability to execute precisely according to your rules. Happy trading and best of luck for a very prosperous 2008!
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