Using Fibonacci Time And Price Relationships In All Time Frames
The following was
transcribed and edited from TraderTalk, a free, live workshop conducted by
Carolyn Boroden for TradingMarkets members on Jan. 23, 2002.
In this
lesson, I want to go over a few examples of how I use
Fibonacci time and price work to set up trades for all time frames. The way you
can use these Fibonacci levels will have to do with what time frame you are
trading.
I have some traders that only trade 2
– 5 times a week off the 15- and 60-minute setups. I have some traders who ONLY
use my work to help time the intermediate changes in trend, and I have some
traders that trade in and out 20 times a day. What I really focus on in my
work is the clustering of both time and price relationships. During most
sessions, I focus on using price clusters to determine a key price support or
resistance zone for short-term trades.
The first example of this is in Chart # 1.
This morning in Nasdaq futures, we opened up
into one of these cluster zones at the 1528-37 area. Instructions are typically
to consider sales on a failure to clear a key price resistance zone. Some
traders choose to use a trigger, like taking out a prior swing low or crossing
over a specific moving average. Some traders may just choose to sell straight
against the zone with the risk defined just above it. This morning the zone came
in at 1528-37…the high was made at 1528…which was followed by a decline to
1503. Not a huge trade, but there were some ticks to be had.
Notice that the 60-minute chart is
showing you lower lows and highs, which is a reason why we considered selling
against that zone. It was in the direction of the trend seen within the
60-minute time period. It also included three 100% projections of the prior
corrective rallies that are illustrated by the red lines on the chart.
Ideally, we want to set up the buy
clusters in an uptrend and set up the sell clusters in a downtrend. After entry,
I will set an objective for the trade which is typically a 1.272 E of the prior
swing, but also would have you using a trailing stop.
Chart #1
was an example of a typical intraday trade in my room that was set up already
the night before. Now let’s take a look at Chart #2.
This is a weekly chart of NDX cash.
I thought this chart was rather important to take another look at when we FAILED
to take out the 12/6 time and price high. After the initial decline from that
high, it looked like the rally was resuming and that this high might be
surpassed….yet it wasn’t…and since the 12/6 high was considered pivotal…a
failure to clear it would suggest a much deeper decline. (I did post a reminder
about this high in my Jan.
18 column.)
Once we started to see the failure, it
told us to look for lower prices into the NEXT time
window which we JUST recently moved into. The
adjusted dates for the NDX for the cycle dates for a potential low are
1/22-1/25.
Chart #3
is the current Nasdaq futures chart which
illustrates just a couple of the time cycles that are coming in during this time
window. Not only do we have time coming in for a possible low, we also hit some
key price parameters this morning: 1499-1503 was a zone we were watching basis
the futures contract; 1503 was the low. A double bottom was made at this level.
Since we had both time and price at
this low, followed by a reversal indication, we have reason to consider that a
low might be in place in Nasdaq…but not sooooo fast. I’ll get into the next
key decisions in this market.
Key resistance comes in this market
via the 60-minute work at 1552-56. The session high was made 2 ticks above this.
Unless we can clear this zone in relatively short order, this contract is still
vulnerable to another shot to the downside.
Chart #4
is the SPX weekly chart. A simple price
count using this cash index alerted us to the recent decline we have been
experiencing. Notice that into the 5/25 high, the SPX rally lasted 234 points.
Then look at the second rally which lasted 232 points. Pretty good symmetry
there.
This 100% price projection of the
prior rally swing then overlapped a few other retracements and projections,
giving us a very strong resistance zone on this weekly chart to remain aware of.
The general zone was tested twice. Each time, we have seen a relatively healthy
decline from it, the same as the Nasdaq. We are also hitting key time and price
SUPPORT parameters right now in the S&P market. These parameters are
suggesting the potential for an intermediate low, either around the 1/22-25
cycles or around 1/30-2/1.
Enough about stock indexes. How about
using Fibonacci for stocks? Let’s take a peek at Chart #5,
Krispy Kreme Doughnuts
(
KKD |
Quote |
Chart |
News |
PowerRating).
A while back, Mr. Fib handed us a beautiful entry into this stock — I think
around the 11/29 low. After a rally to 46.90, we saw this stock pull back into
another grouping of Fibonacci price relationships. Initially, this zone around
the 39-40 area held and produced a $4.00 rally…but then…ahhhh…a failure,
which is why we need to use trailing stops.
Sometimes these levels work great.
Sometimes these clusters produce only a minor change in trend. Sometimes they
just don’t work, and you get stopped out with a minimal loss. But bottom line:
These zones DEFINE risk very well.
In a
recent column I wrote about PeopleSoft
(
PSFT |
Quote |
Chart |
News |
PowerRating)
(see Chart #6 above). I had two standout cluster
zones for potential entry into this stock. I believe the first zone held for
about a day. Then yesterday we slammed down into the second zone at the
31.71-32.91 area. So far the second zone is holding.
Let’s say you saw a buy trigger via
your methodology after this key support zone was tested. Your job is to take the
entry with your MAXIMUM risk below the cluster
zone. Sometimes you can tighten your risk further depending on what kind of
entry “system” you prefer. Bottom line: I have about 90 traders in my
chatroom during the day, and each of these traders has a different method of
entry against the zones that are set up.
These numbers are best taken advantage
of by using your own entry “methodology,” depending on what time frame
you prefer to trade.
Q&A
Q:
When you create your “cluster” zones, could you explain which
points (highs/lows) you are using? Is it strictly off wave counts? Or are the
actual wave counts not that important? In other words, do you use swing highs
and lows regardless of wave? If so, how do you get around this in DT?
A: OK.
Well, on a particular setup, I can tell you which lows I identify as key as the
ones I have used to calculate a cluster. They are NOT
based on Elliott Wave. They are just what I determine as relevant to the current
market and pattern I am looking at. As far as how YOU pick
them out, that is a bit more difficult. That becomes an art. This is something I
just went over with a student for 10 hours this weekend.
Q:
What oscillators do you use to confirm S/R in the Fib zones?
A:
Honestly…I just started throwing up oscillators on my charts. I never used
them. I just used time and price to make my decision, but at the request of a
few clients, I started using the Stochastic/RSI from Miner’s program. Since I’ve
only been using it for a week, the jury is out…though there are plenty of
oscillator junkies in my chatroom you can ask.
Q:
On the NDX, is it valid to assume W.A ended 12/6 (and not 1/9)? If so, is it
also possible that W.c:B potentially ended yesterday (with W.b:B ending 1/9)?
A:
OK, please don’t assume I’m an Elliot wave expert…because I am NOT. I only use
the Elliot patterns when they coordinate nicely with Fib time and price. In the
example of the NDX, it does look like a possible two-step correction into both
key time and price parameters. I would base my trading decisions against that,
and I don’t care if it’s a b c or x.
Q:
What identified 12/06 as “pivotal”?
A:
Well, I do have
a column I did in early December on the cluster of time cycle relationships
that came in between 12/3-12/5, +/- a day. We ended up making the high on 12/6
which was within the time “window” for a high, and there was also
price there. When time and price comes together and we see a reversal, it then
becomes a PIVOTAL high or low.
One of the main Fib cycles is on the
NDX weekly chart above. It was the .618 time cycle of the 5/22 high to the 9/21
low.
Q: Can
you go over the “Pssst…PSFT”
call you gave a few days ago, i.e., how it came out and how you traded it?
A:
OK…I have a secret…I run the stock analysis the same way I run my index
stuff, but I only have some others that are actually trading the stock work. But
the parameters are pretty much the same. I would look at the price cluster zone
in question for entry, and then look for a trigger on a lower time frame chart,
maybe a 60-minute, maybe only a 5-minute depending on your time frame. The
initial risk would be defined below the cluster, and then it should be trailed
with a stop. It looks like there was the first entry that would have been
stopped out. I had one guy tell me this morning that he bought it yesterday at
32. Hopefully he’s using a trailing stop or booked some profits.
Q: How
can we calculate the clusters? Is there written material on this?
A: I
have written two basic lessons on how to calculate and use the price clusters. (How
I Use Fibonacci to Identify Key Support and Resistance Levels and How
To Time Individual Stocks Using Fibonacci Price Analysis)
But also, for you serious students, please consider Robert Miner’s book
“Dynamic Trading”. You can check it out at dynamictraders.com.
But also KNOW that I have taken this work a step further than Bob when it comes
to clusters. So, he will give you great foundation, I can fill in the
blanks…until I decide to write a book of my own. lol.
Q:
As a neophyte to your “cluster zones,” could you give a definition
or general idea of how these are derived?
A:
I define a price cluster as the minimum of three Fibonacci price relationships
coming together within a relatively tight range. They can be price retracements,
price extensions or price projections within these calculations. The more levels
that show up within these “cluster” zones, the more important the
decision is. I figure them from all the highs and lows on the chart I am
analyzing that I feel are relevant to the current price activity. There is a
great example in that article I wrote if you can get a hold of that.
I take prior lows to highs and run the
retracements, for example, for support. Then I run any meaningful extensions of
prior lows to highs. Then I will also measure swings in the same direction, for
example, 100% of a prior decline, and then project that from a new high for
possible support. Where all these price projections OVERLAP
(which is why you can’t ever read the numbers) is the CLUSTER.
Q:
How do you make the calculation on the charts for Fib levels?
A:
Well, you can do them by hand, but that is tedious. I use the DT software which
calculates all the price relationships for me. I just pick the low-to-high or
high-to-low to run retracements and extensions, and I just click on the
highs-to-lows and project from another high or the other way around to run my PROJECTIONS.
There are also more examples on my work from the two conferences I did in Vegas
with TM. I think about 50 pages in 2001, maybe less in 2000.
Q: Do
you have to determine the pivots to get the clusters or does Dynamic Trader do
that for you?
A: I
determine the swing highs and lows to use in my analysis, though there is a
module in DT that will make “swing files” and automatically point out
certain % swings, but this process is by no means automatic. My head spins
around during the day like the chick in “The Exorcist.”
Q:
What about trading just measuring out the swings without getting much into
the clusters? Have you had any success with just doing that?
A: Well,
you can have success using single retracements, but there is NO
way I would do that now with what I know. Why not have all the
confirmation you can? And why not point out the highest probability zones for
you to trade against??
Q:
Do you use Advanced Get to help determine your clusters?
A:
I don’t use Advanced GET, but I used to. You can make clusters with that
program. But I DO love the MOBs and the Ellipses on
that program. I prefer DT since I am a perfectionist, and I know I am getting
the EXACT high and low when I am calculating my
levels.
Q:
What is your thinking about trading only Gartley setups? Have you had any
success doing that. or would you recommend it as a trading method in and of
itself?
A:
I think you need to trade more than just Gartley patterns, but I LOVE Gartleys.
They are really high % trades when they set up correctly. I have an article on
my website (syncmt.com) on Gartleys under
EXTRA FILES. I will also repost my examples of this soon. Another place to go is
tradingtutor.com. Larry Pesavento did
a great book on Fibs and pattern recognition.
I would hate to tell someone to only
trade that method because they may miss some huge moves waiting for the ideal
pattern. There are plenty of other patterns. I have my favorites — one is
just a cluster in the direction of the immediate trend that includes symmetry
projections of the prior corrective moves.
Q:
Isn’t the MOB in Advanced GET = clusters?
A:
The mob in GET sometimes overlaps one of my clusters. I just consider that
confirmation of my cluster zone since I don’t know the algorithm Mr. Josephs is
using. :) Some people in my chatroom yell out if a mob is overlapping a cluster
zone. It works nicely. New one on me…can you direct me to a resource?
So, to wrap up, I simply use Fibonacci
time and price relationships and the CLUSTERING or
coincidence of these relationships to identify key support or resistance zones
to buy or sell against, IDEALLY in the direction of
the main trend!!! I prefer being a trend-following moron like Mr.
Landry.
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