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Technical analysis and the mastery of it is a long continuous journey, enjoy the time you spend on your journey to a more profitable you.
- John Novak | |
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Today's Featured Article
Why determining potential turning points in advance is important for every trader
A trader needs to know where the potential turning points are going to be in the market in order to have the foresight to make the proper trading decisions that will yield the highest possible returns for the least amount of risk. Fibonacci not unlike Elliot Wave analysis is a set of simple rules that provide traders the ability to predict the potential of a move prior to the move happening by analyzing swings or waves in the market. Elliot wave formations can change as the market progresses while Fibonacci ratios derived from swings that have already happened will never change. Our experience tells us that 100% objective Fibonacci price projections and retracement methodologies
will give you the most consistent way to determine in advance where the market will have the highest potential to turn when done correctly.
Common Fibonacci Ratios and Their Qualities
Many traders today use Fibonacci in their trading. Most of the time this will consist of retracement levels from major swing and more advanced traders will use extensions of past swings into the future. Some common Fibonacci ratios that traders will use are 38.2%, 50%, 61.8%, 100%, 138.2%, 161.8%, 200% and 261.8%. Fibonacci ratios will have a more "exhaustive" quality the larger they get. For example, a 78.6% retracement will have more chance of stopping a move than a 38.2% retracement will. This is true for extensions as well; a 261.8% extension will have more chance of stopping a market than a 138.2% extension.
In addition to the higher exhaustive quality of the higher Fibonacci ratios, in most cases the higher the timeframe the Fibonacci ratio was generated from the greater the chance it will have an influence on the market. Knowing this information you are able to give more credence to higher Fibonacci ratios and from ratios from higher timeframes when doing manual analysis.
This take an even more powerful turn when you are able to find and apply Fibonacci ratios from multiple timeframes and multiple swings that land into a relatively small zone on your charts. The amount of work necessary to do a complete analysis of every possible Fibonacci line from every swing on every timeframe makes it nearly impossible for anyone to achieve consistent results. Those who have learned how to master this art and who are only able to use the "right" ratios from the "right" swings are able to consistently able to call tops and bottoms using Fibonacci.
The T-3 Fibs ProTrader has mastered this art, and allows the trader to focus less on analysis and more on what is important, assessing reward versus risk and making the trade. Let's first take a look at the types of Fibonacci projections that the T-3 Fibs ProTrader will use in it's analysis.
How to Set up the Fibonacci Tool
How to do this manually in Tradestation or any other platform your using such as MultiCharts you will need to select the tool from the drawing menu.
Then you must format your Fibonacci tool in your platform to have the ratios that you wish to use in your analysis of the market.
Go here to see a typical setup using the most common ratios. You may change colors and lines to your personal preferences.
The Fibonacci tool is then applied to the charts by dragging and dropping the tool from your starting and ending pivots that you wish to analyze. | |
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Fibonacci Projections and Retracements Defined
There are 4 main Fibonacci projections that we use in our software:
1. Extensions - take the range from pivot #1 to pivot #2 multiply that distance by a Fibonacci number, add the two numbers together and it will give projections into the future where a possible turning point could be.
If you cannot view the Extensions chart,
go here.
2. Expansions - take the range from pivot #2 to pivot #3 multiply that distance by a Fibonacci number, add the two numbers together and it will give projections into the future where a possible turning point could be.
If you cannot view the Expansions chart,
go here.
3. Alternates - take the range from pivot #1 to pivot #2 multiply that distance by a Fibonacci number, add that to Pivot #3 and it will give projections into the future where a possible turning point could be.
If you cannot view the Alternate chart,
go here.
4. Retracements - take the distance from a #1 pivot to the #2 pivot and take a portion of that range that is commonly less than 100%. The most common ratios are 38.2%, 50%, 61.8% and 78.6%. This is usually more beneficial from higher timeframes when determining reversal areas.
If you cannot view the Retracements chart,
go here.
Now we are going to use this setup to define a multiple timeframe key Fibonacci confluence area that we can make trading decisions based on our knowledge.
If you look at the following chart of the S&P 500 minis the overall trend is down.
 Go here to view the example chart.
Once we make a bottom and the short-term trend turns back to up by making higher lows we want to know where this pullback may stop and where we can resume the longer-term downtrend again.
This is a blowup of the chart above... as you can see we have labeled some of the swings for you as 1-2-3. Once we have put in the GREEN #3 pivot we have short-term trend up and we are working to anticipate where the trend will end. Once we have the smaller swings of the BLUE 1-2-3 we now have enough information to start our Fibonacci analysis.
Go here to view the example chart.
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Manually Calculating Fibonacci Confluences Step by Step
The first step will be to go back to where the last major swing down has started and calculate our retracement levels.
As you can see in the following chart with the MAGENTA 1-2-3 we are calculating the Retracements from the #1 to the #2 pivots.
Go here to view the example chart.
Now we are going to use the GREEN 1-2-3 pivots and do our Extensions, Expansions and Alternates.
Go here to view the example chart.
Go here to view the example chart.
Go here to view the example chart.
Once we have completed our analysis on the GREEN 1-2-3 we will start our work and repeat this process on the BLUE 1-2-3. First we will start with Extensions from the 1-2 pivots.
Go here to view the example chart.
Once we have our extensions we will do our Expansions from the 2-3 pivots.
Go here to view the example chart.
Then we will take the distance from 1-2 pivots and do our Alternates.
Go here to view the example chart.
What we will end up with is a tight range where many different Fibonacci ratios from several different sets of 1-2-3 fall together. This is what we call a Fibonacci confluence.
This is where we will look for the overall longer-term trend to continue.
Go here to view the example chart.
Now that we know where are key areas are let's take our first look at the T-3 Fibs ProTrader and how the software will automatically call key areas of Fibonacci support and resistance.
Go here to view the example chart.
What makes the T-3 Fibs ProTrader so special? The answer is summed up in 3 words, power, accuracy and consistency. The software will do EVERY possible 1-2-3 swing from well over 150 days worth of data or more, then it will "synthetically" build 9 higher timeframes and do every possible 1-2-3 from those "higher" timeframes and generate every possible Fibonacci line for you automatically. The snapshot below will show you the "raw" number of Fibonacci lines that the software is generating on a single chart. The background color has been changed so you can see each of the lines a bit clearer.
Go here to view the example chart.
Let's take a slightly closer look at those lines. As you can see ...there is a Fibonacci line on just about every tick in the market.
Go here to view the example chart.
The power of the T-3 Fibs ProTrader is that it is able to take all of the raw Fibonacci lines, rank them according to strength, and strength dictated by timeframe, then filter out the noise and leave you with a clear picture of where the market has the most powerful combination of Fibonacci confluences. Not only will the software give you the areas at which to get in, the key Fibonacci areas will also help you to dictate how much potential there is on any given trade prior to entry.
The T-3 Fibs ProTrader will also give you a level of consistency in your Fibonacci analysis that is almost impossible to duplicate by hand. Most importantly it will allow you to focus on being a trader and not an analyst.
So if you are a master at the art of Fibonacci then congratulations, if not you will need a tool that will give you the power and accuracy to make more profitable trading decisions.
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About the Author
John Novak
is President of Nexgen Software Services Inc. John is the developer of the T-3 Fibs ProTrader indicator package. He has been involved in the marketing and distribution of Technical analysis software for the last 13 years. He has devoted the last 10 years to the automation of a popular discretionary methodology that he taught in seminars for over 2 years to many successful traders that was centered on Fibonacci analysis of both time and price. With the help of his software programmers they have automated this entire Fibonacci process into a fully automatic program. He spends his days working on constant improvements in his analysis in predictive indicators for traders and spends
the day trading his own methods. | |
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