There is perhaps greater truth in market manipulation. How often have
you read a stock upgrade or downgrade only to find price moves in the
opposite direction as the main players in the stock sell into buying
strength on the upgrade news and the reverse of a downgrade, resulting
in an up move once the initial selling subsides.
Trends make the Money !
Traders need trends but trends have a habit of
rarely moving cleanly from one area of price action
to the next. A process of backing and filling takes
place caused by profit takers and opportunists
looking for counter trend rallies or corrections.
These moves also shake out weak traders from the
main trend and then allow stronger players to add in
to positions as the rallies or corrections revert
back to the main trend. There are several ways of
looking at trends and finding the optimum entry and
exit points and Fibonacci provides some excellent
clues to where price is now, where it has been and
where might it go next.
Fibonacci is based on the number sequence 1-2-3-5-8-13 and so on to
infiniti. Leonardo Fibonacci discovered the sequence way back in the
twelfth century, he carried out research that linked the sequence to
many naturally occurring phenomena. By dividing one number by the next
the ratios of 0.681 and it’s reciprocal 1.618 are found. Many believe
these ratios have mystical significance as they are found in
calculations relating to the ancient pyramids and throughout nature in
sea shells, petals, and the relationship between the lengths of bones in
the body and so on.
So is 0.618 the answer to the universe and everything within or is it
just a self fulfilling prophecy - when applied to the markets?
I subscribe to the latter as mysticism, astrology and the like don’t sit
easily with me. If there are thousands of traders out there who are
following Fib then I want to follow what they are doing. Maybe certain
markets follow Fib purely because the majority of players are fixated on
it just as a fashionable analysis technique of the time. It is and has
been, very widely followed, particularly in the Foreign Exchange market but there
was a time when very few traders had even heard of Fibonacci.
However, if it works for me, and it does, then I’m a Fib trader and I’ll
The standard Fib ratios are 0.618, 0.382 (usually expressed as
percentages, 61.8% and 38.2%) and the Gann ratio of 50%, which is often
stated incorrectly as a Fib ratio. I also use the so called 'Secret
Ratios' that apply to the Foreign Exchange markets in particular but I'm sure you
will forgive for not revealing all just yet.
The basic theory works by considering to where price might pull back as
the major trend undergoes a correction or rally. These counter trend
moves occur for a variety of reasons from traders booking profits along
the way of a big move to other players deciding the main trend has
turned, to short term counter trend traders catching what can sometimes
be explosive snap back moves from an overbought or oversold market.
These ‘jobbing’ trades are used by funds where the major holding is with
the longer term trend and counter trend trading provides protection and
profits as the correction takes its course.
Fig one shows a simple Fib Grid with a counter
trend move that turns at the 78.6% line. Stock
traders tend to be of the opinion that for the main
trend to continue, the turn should occur no later
than the 61.8% retracement. They would consider the
major trend has run out of steam if that was
breached and a reversal highly likely that would
ultimately be signalled when the previous high,
above 100% was taken out.
In my experience playing in the Foreign Exchange market, this
is not so. Retracements are often very deep with
turns occurring at the higher Fibs, and often
reaching the 88.7% level before turning tail and
resuming the main trend. Indeed there are some
specific chart patterns that play out in the Foreign Exchange
market that confirm themselves by turning at 78.6%
or 88.7%, but more on those in a later article.
There are also some specific chart patterns
that play out in the Foreign Exchange market and others that
confirm themselves by turning at some specific and
important Fibonacci levels - these patterns are
beyond the scope of this article and you can learn
exactly how to trade these advance patterns in my
So just how can Fib retracements be used to make
There are several and these include:
Entering a trade on a Fib pull back once a trend is
Using multiple, or a confluence of Fib retracements,
to confirm future support and resistance areas for targets and
Project future swing extensions based on the last
Combine retracements with extensions to give trade
target areas and entries for limit orders.
Find future time based targets for significant highs
Trade specific chart patterns including the Gartley
Fibonacci pull back entries are the standard ones and just require a
trend to be in place. At some point price will stop moving higher or
lower and retrace so here are the rules:
Wait for price action to stop and start moving back
against the trend.
Set the Fib grid between the last swing high and the
just formed, swing low.
Wait for price to turn back in the direction of the
main trend as it bounces off the Fib retracement line.
The down trend is in place and, as soon as the first bounce starts,
place the FibGridTM between the last high (A) and the current
swing low (B). As price moves away from the Fib line at C, enter a sell
short trade with a stop above the 38.2% Fib line.
As price moves lower than D there is another Fib retracement
opportunity as D is 50% of the last swing (it's not marked up but
confirm it by checking with a ruler and calculator – or with the FibGridTM)
The next trade entry occurs at F, again enter the short sell as price
moves back in the direction of the main trend.
As you can see, Fib entries occur a good many times here and this pair,
the AUDUSD, works very well using the Fib retracement technique.
The FibGridTM is an overlay that you can place on any
chart or image that you have on your screen and is not dependent on your
charts. This is the tool I use every day and the full series of
Fibonacci Trading Videos, together with the Fib and Click grid in now
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