Fibonacci Trading Strategies

[Soultrader 12]

I want to briefly explain a fibonacci trading strategy I use on a daily basis. I look at two key retracement lines: the 61.8% and 50% fib retracements. This I call this zone the "hot zone". I will pay close attention when prices retace or pullback to this zone.

 

Uptrend strategy: In an uptrend, I want prices to retrace below the 50% fibonacci retracement but close above the 61.8% retracement. If the hot zone acts as a key support zone, I will enter a long position with a 3-5 tick stop below the 61.8% retracement line. I will scale out +10 for the dow mini's and exit all or most of my position at the previous swing high.

 

Downtrend strategy: In a downtrend, I want price to retrace back to the 50% fibonacci retracement line but not close below the 61.8% retracement. I am looking for the hot zone to act as a key resistance level. I will enter a short position using a 3-5 tick stop above the 61.8% retracement. I will scale out +10 for the dow mini's and exit all or most of my position at the previous swing low.

 

Just remember this: 61.8% for an uptrend & 50% for a downtrend. These are the two main levels I will look at. I time my entries based on the tape. For those who are not tape readers, I highly recommend you put the time and effort into learning this valuable skill.

[bobcollett 10]

I want to briefly explain a fibonacci trading strategy I use on a daily basis. I look at two key retracement lines: the 61.8% and 50% fib retracements. This I call this zone the "hot zone". I will pay close attention when prices retace or pullback to this zone.

 

Uptrend strategy: In an uptrend, I want prices to retrace below the 50% fibonacci retracement but close above the 61.8% retracement. If the hot zone acts as a key support zone, I will enter a long position with a 3-5 tick stop below the 61.8% retracement line. I will scale out +10 for the dow mini's and exit all or most of my position at the previous swing high.

 

Downtrend strategy: In a downtrend, I want price to retrace back to the 50% fibonacci retracement line but not close below the 61.8% retracement. I am looking for the hot zone to act as a key resistance level. I will enter a short position using a 3-5 tick stop above the 61.8% retracement. I will scale out +10 for the dow mini's and exit all or most of my position at the previous swing low.

 

Just remember this: 61.8% for an uptrend & 50% for a downtrend. These are the two main levels I will look at. I time my entries based on the tape. For those who are not tape readers, I highly recommend you put the time and effort into learning this valuable skill.

 

 

Dear Soultrader

Do you still look at this "hot zone"?

Or has the market moved on.

Kind regards

bobc

[JMB 10]

Are there any traders out there that actually use the fibo ratios in their everyday live OTHER THAN TRADING???

The reason i ask this is the following. All these traders that use Fibonacci in their trading were sold the idea that fibonacci should work because this ancient Italian stumbled upon a so called Golden Ratio that you can find in all other things in life. I still don't see a valid reason why i should plot these ratios on my chart. I mean , if i get into my car to drive from point A to point B , should i make a 180 degree turn once i have driven 61.8% the way??? no, you would never do that, but traders seem to find it a valid reason to get into the market. I have yet to meet the trader that is consistently profitable with using the Fibonacci ratios. Wallstreet is literally laughing its way to the bank because of all retail traders using all these crazy looking indicators. All that is missing is one of these big institutional guy's coming out in public telling us that he found some weird mathmatical sequence hidden in some box in the desert beneath some piramid (which caused his trading succes) and there will be traders standing in line to pay for that sequence, as if they were in line waiting to get the new ipad4 at the apple store.

[SIUYA 11]

Are there any traders out there that actually use the fibo ratios in their everyday live OTHER THAN TRADING???

The reason i ask this is the following. All these traders that use Fibonacci in their trading were sold the idea that fibonacci should work because this ancient Italian stumbled upon a so called Golden Ratio that you can find in all other things in life. I still don't see a valid reason why i should plot these ratios on my chart. I mean , if i get into my car to drive from point A to point B , should i make a 180 degree turn once i have driven 61.8% the way??? no, you would never do that, but traders seem to find it a valid reason to get into the market. I have yet to meet the trader that is consistently profitable with using the Fibonacci ratios. Wallstreet is literally laughing its way to the bank because of all retail traders using all these crazy looking indicators. All that is missing is one of these big institutional guy's coming out in public telling us that he found some weird mathmatical sequence hidden in some box in the desert beneath some piramid (which caused his trading succes) and there will be traders standing in line to pay for that sequence, as if they were in line waiting to get the new ipad4 at the apple store.

 

Valid points except that using a fib example to talk about driving a car is like saying I plan to fly to the moon using nothing but mind power.....different tools, different applications.

I think fib numbers can offer help in providing possible take profit, or retracement levels.

By it self it might be limited, and there is a fair bit of subjectiveness in where to apply it.

 

Using one tool in the tool bag would not make for a very good carpenter - or using your analogy - driving a car with just an accelerator and no brakes might be fun for a short period.

re wall st - they are laughing as they take a clip, and many of them do use similar measures such as creative accounting to laugh even harder at the poor institutional punters. Myth number 1 - The retail guys dont feed wall street.

and some Insto do use black boxes! Most of them are not the rational beings they are made out to be.

 

Plotting anything on a chart does not make it true. It just needs to fit in with your view of the markets, money management, strategy, psychology, etc; etc; etc; otherwise it probably is superfluous.

[JMB 10]

Hi SIUYA,

 

Thanks for your reply.

No pun intended to the fib traders in my last post.

I actually realy like what is writen on the bottom of your post "CONTEXT IS KING", you see that is something that does make sense

[SIUYA 11]

no probs....i think your point is valid. Years ago I read two books.

One was called "trading with the Gods", the other "The Trading Rule That Can Make You Rich* (Dohson)

 

Much the same result except one approached it from a mystical, magic secret sauce (IMHO crap) approach.

The other from a more practical standpoint. I went with soul traders original view. Keep it simple, keep it simple keep it simple.

 

As per real life I guess the maths whizs and engineers could tell you. I think in life there are definately cetain ratios that work and make sense - eg; stair raisers, building proportions, and the like. Additionally there are certainly aesthetically pleasing ratios - The Math Behind the Beauty

 

and maybe markets based on human traits have similar ratios.

I just need to remember Keep it simple, keep it simple keep it simple.

 

To a certain extent, computers are like the modern day sirens of the sea allowing us to do ever more complicated things (and there are those who maximise this and do it well - IMHO Wall street is not it. Wall st is there to redistribute money and take a clip not to trade), and thats great, but often its too distracting, tempting to want to perfect the maths.

There is that great joke i love - "Nasa spent millions researching and testing a pen that could write upside down in zero gravity for space missions but could not get one to work. When they asked the Russians what they used the answer was "a pencil""

[TheNegotiator 13]

Haha Siuya! That story about the Nasa pen is a funny one! But it does illustrate a good point.

 

How traders use ratios is a point that I'd like to underline. Fibonacci ratios are effective if used appropriately. The trouble is that many traders don't know what to use them for. It's usually they draw them automaticall from highs to lows. This isn't always going to yield results. Plus, even if you are applying them correctly it doesn't always mean you should be trading at a specific level.

 

Before I go any further I'd just like to point out that 50% is not a fibonacci ratio, yet it is very useful as many other use it (self-fulfilling prophesy yada, yada) and so I include it for my purposes.

 

Briefly how I use ratios goes:-

 

Close to open session gaps. This is the most useful reference within the first say 30mins or so after regular trading hours (RTH) open. Obviously this might not be as useful if you trade different products. I trade ES and so I do find it useful. I only really look at 50% and 38.2% as a measure of gap closing ability. I also use the extension ratios. I.e. (1)27.2%, (1)38.2%, (1)50%, (1)61.8% & (2)100% extensions. I'll make the point now but this applies to every ratio I use. I LOOK FOR CONFLUENCE BETWEEN THE RATIOS AND MY LEVELS. After I'm confident the initial balance (IB- the first 60mins of the RTH session) is in, I do the same on the IB. What is particularly important to me here is on breaking the IB high or low, if the market stops short of the 27.2%/38.2% extension, I am on alert if there's a subsequent break back into the IB. It suggests to me that the move wasn't strong and that there may be some work required in the opposite direction. After I have garnered any IB ratio information, I use the 50% on the day session. Not much more. Then on any strong move caused by some kind of announcement, I look at 38.2% of that move for continuation, 50% for a possible reversal of the move and 78.6% for a final reaction before a complete capitulation and break back the other side of where the move started from. I also monitor important longer term swings.

 

This is basically how I use fibs. Sometimes I lean on them for an entry if I have confluence and sometimes they are geometric activity markers only. I have to stress that whatever you do, make sure you use them with your own structural context. Hope this helps.

[TheNegotiator 13]

Negotiator,

Can we negotiate a bit on the ratios because you are mixing up apples and oranges or is it pears...or even pairs?

 

As in pairs 0.236 + 0.764 = 1 and 0.382 + 0.618 =1

 

1,272 is the square root of the ratio 1.618

0.786 is the square root of the ratio 0.618

 

Sorry what exactly are you suggesting I'm "mixing up"?

[bobcollett 10]

Sorry what exactly are you suggesting I'm "mixing up"?

 

I'm also a bit confused with the post

1+1=2 So what?

bobc

[TheNegotiator 13]

Ratios and square roots of ratios.I'm not exactly a wizard with maths and my post wasn't meant as a personal criticism of your post or your methods.I just think it's important to to clarify in very clear terms what is a ratio and what is a sq rt.

It's often been said that if you are going to use an indicator you should understand how it is calculated and what it is telling you.You understand the difference maybe,but does the reader? For somebody new to Fibonacci,or new to any subject,it is helpful to state things very clearly in simple terms.That is why i said you were right to state clearly that 50% is not a ratio,when so many sources do not make that clear.It doesn't help that Fib tools have the 50% level built into them,it makes me wonder when people say fibs don't work what exactly they are basing this opinion on?

 

As in pairs 0.236 + 0.764 = 1 and 0.382 + 0.618 =1

 

1,272 is the square root of the ratio 1.618

0.786 is the square root of the ratio 0.618

 

Other than 1.618 and 0.618, all other ratios are derived ratios (again, apart from 50% which is a separate geometric point traders look at). I use the roots as I find they are more helpful to me. I never really liked 0.236/0.764 because they just always seem a little off to me. But then the variation is hardly monumental. My suggestion if anyone is confused here is pick 0.236/0.764 or 0.272/0.786 and stick with those consistently. Either should be reasonable to use.

[TheNegotiator 13]

Well,your suggestion leads to a logical question for anyone considering using these ratios.What is your opinion/experience with regard to different preferred ratios applied to different instruments? Even though the indicies tend to move together i have found that ratios that work well with the SPX do not work as well with the DOW for example.I have also seen that Forex traders are using different ratios,and often sq roots.

 

My opinion is just like individuals, different instruments seem to have different 'personalities'. However, the suggestion that specific ratios work better with different products is just a qualitative idea for me as I haven't done any thorough investigation on it. Perhaps the idea that interests me more though is behavioural patterns relative to market phase. Do products in general exhibit a tendency to ahere to geometric structural pattern (or anything else for that matter) when they are within a certain identifiable behavioural phase regardless of what the product or product type is?

[JMB 10]

and maybe markets based on human traits have similar ratios.

I just need to remember Keep it simple, keep it simple keep it simple.

 

I'd personally say that there are no ratios at al. I lean to Suply/Demand and business cycles. Well some might see that as ratios.

I also think traders need to keep it as real as possible and think logic about things. To give you an example. Almost alway's when you go to any brokers website they offer you FREE trading courses or even worse a complimentary signal service for a month or two, but what is the logic behind that?? Why would a company teach you how to REALLY trade and win and make money if that's exactly what would make them loose, right? If you win, the broker needs to pay up. Having that said and going back to keeping it simple,......can we keep trading simple? I'm not so sure about that but we can cross out what's bogus and look at what is real and keep a logic view of things.

[bobcollett 10]

I'd personally say that there are no ratios at al. I lean to Suply/Demand and business cycles. Well some might see that as ratios.

I also think traders need to keep it as real as possible and think logic about things. To give you an example. Almost alway's when you go to any brokers website they offer you FREE trading courses or even worse a complimentary signal service for a month or two, but what is the logic behind that?? Why would a company teach you how to REALLY trade and win and make money if that's exactly what would make them loose, right? If you win, the broker needs to pay up. Having that said and going back to keeping it simple,......can we keep trading simple? I'm not so sure about that but we can cross out what's bogus and look at what is real and keep a logic view of things.

 

Dear JMB

That sounds like the name of an expensive whisky

Reading between the lines I think you are saying fibs are not logic.

I agree .I find them pure clutter.

But lots of traders use them, some very successfully.

I have a trading friend who will tell me exactly when to get out using fibs.Sometimes!!

I remain a disbeliever.

kind regards

bobc

[SIUYA 11]

I'd personally say that there are no ratios at al. I lean to Suply/Demand and business cycles. Well some might see that as ratios.

I also think traders need to keep it as real as possible and think logic about things. To give you an example. Almost alway's when you go to any brokers website they offer you FREE trading courses or even worse a complimentary signal service for a month or two, but what is the logic behind that?? Why would a company teach you how to REALLY trade and win and make money if that's exactly what would make them loose, right? If you win, the broker needs to pay up. Having that said and going back to keeping it simple,......can we keep trading simple? I'm not so sure about that but we can cross out what's bogus and look at what is real and keep a logic view of things.

 

The previous debate between other posters over ratios is interesting.....they are all ratios (A "ratio" is just a comparison between two different things. - in our terminology its expressed as a percentage of a "move"/"wave" - in terms of extensions or retracements)

The difference is that as said, 50% is not a fibonacci ratio or related to the fib sequence of numbers.....however its still a ratio that probably has a valid relevance to my trading style and the way I view the markets.....to me thats all that counts.

As we know that even small things can make a big difference, and yet you dont need to be too exact to get value (eg; 49%, 50%, or 51%), however it is scary how often the exact number is hit.

Notice how many people seem to use the MA numbers of 21 and 34.....this can be tested via optimisation - i dont know or care if theses are valid, but they are fib numbers.

 

Given your first question about fibs do you not find it ironic that you pick supply and demand and cycles to lean on, which could be argued are just as subjective.

Its what ever works based on how you view the markets. IMHO, and then how in the context of things you apply things.

eg; if your cycle or ratio is telling you to buy, and things are in a downtrend, or some other element is saying this is a high risk low return trade, then it might be best to skip the trade.

For what ever gets used its about 1....whats the market doing, 2....where can i get in an profit from this whereby if i get it wrong, i loose little, if i get it right i make good money.

Then looking at both of these and trying to find a more consistent/systematic way to approach it (rather than coin tossing). All this has to fit in with how you view the market moves/works - otherwise you will get a mismatch in thought and invariably problems.

 

Re the FREE - its all marketing. Period. No different to any shop offering discounts. Remember not all brokers trade against you....some actually want you to make money, increase size, and keep paying brokerage. (a bit old school)

 

Re keeping it simple - can we - yes, and I think your suggestion is a good start. (unfortunately as humans we like to complicate things)

 

Keeping with the fib numbers....i like to keep it simple - 50% works as a tool in my toolkit to signify a zone of either entry, or taking profits, and 61.8% tells me that maybe the 50% tool was not the best one for the job.

[karoshiman 10]

 

...

 

Why would a company teach you how to REALLY trade and win and make money if that's exactly what would make them loose, right? If you win, the broker needs to pay up.

 

...

 

 

 

I think you have a distorted view on how the industry works. Brokers make money by collecting commission and/or the spread. So, in fact, they are interested that you STAY in business for as long as possible and that you trade as much as possible. The latter could lead to overtrading and hence, to more than the normal amount of losses, but that's a different matter and up to you.

 

In most cases brokers try to hedge client positions so that they don't have market risk on their books.

 

However, I agree that the courses provided by brokers will not make you a "market wizard"...

 

 

EDIT: Did not see that there is a 3rd page on this thread already... hence, didn't see SIUYA's comment either... just clicked the reply button