|Fibonacci jumped into the technical mainstream late in the
bull market. Futures traders had it all to themselves until
real-time software ported it over to the equity markets. Its
popularity exploded as retail traders experimented with its
arcane math and discovered its many virtues.
||Fibonacci ratios describe the interaction between trend and
countertrend markets -- 38%, 50% and 62% retracements form the
primary pullback levels. Apply these percentages after a trend
in either direction to predict the extent of the countertrend
swing. Stretch a grid over the most obvious up or down wave, and
see how percentages cross key price levels.
|Convergence between pattern and retracement can point to
excellent trading opportunities. Keep in mind that retracements
work poorly in a vacuum. Always examine highs, lows and moving
averages to confirm the importance of a specific level.
Discord between retracement and the underlying pattern generates
noise instead of profit. Move on to a new chart when nothing
lines up correctly. This divergence generates most of the
whipsaw in a price chart. Alternatively, strong phasing between
Fibonacci and pattern exposes highly predictive reversals at
narrow price levels.
Let's look at five tricks to improve your Fibonacci skills. Add
these twists and turns to your toolbox and apply them to your
next trade. I promise they'll serve you very well in the years
First Rise/First Failure
First Rise/First Failure marks the first 100% retracement of
a trend within your time frame of interest. It provides an early
reversal warning after a new high or low. The 100% retracement
violates the major price direction and terminates the trend it
corrects. From this level, the old trend can reestablish itself
if it breaks through the old 38% level. More often, traders will
use that level to enter low-risk positions against the old
Parabolic movement tends to occur between the 0%-to-38% and
62%-to-100% Fibonacci levels in all trends. This tendency offers
a great tool for finding the big moves when looking for trades.
Watch for congestion to form at the 38% or 62% level. Then use a
simple breakout or breakdown strategy when price moves past it.
The next thrust can be dramatic, with price moving like a magnet
back to an old high or low. Of course, the strategy only works
when you can find these levels in advance.
Continuation Gap Extensions
You can often target the exact price a rally or selloff will
end at by using the continuation gap as a Fibonacci extension
tool. Identify the gap by its location at the dead center of a
vertical price wave. Then start a Fib grid at the beginning of
the trend and extend it so the gap sits under the 50%
retracement level. The grid extension points to the terminating
price for the rally or selloff.
Find an active stock and start a grid from the high (or low)
of a session's last hour. Stretch the grid to the opposite end
of the next morning's first hour low (or high). This defines a
specific price wave traders can use to uncover intraday
reversals, breakouts and breakdowns. The overnight grid also
offers a way to trade morning gaps. The gap will often stretch
across a key retracement level and target low-risk entry on a
Many traders can't figure out where to start a Fib grid.
Here's a trick to help you place it where it'll do the most
good. The absolute high or low in a price wave isn't the best
starting point for a grid most of the time. Instead, look for a
small double bottom or double top within the congestion where
the trend began. Swing one end of the grid over this second high
(or low), instead of the first. This will capture a specific
Elliott Wave that conforms to the trend you're trying to trade.