Fibonacci Trading (Carolyn Boroden)

Steves Synopsis ...................................................................................................................................2 Chapter 1: Fibonacci Numbers and the Golden Ratio .......................................................................3 Chapter 2: Applying Fibonacci Ratios to the Price Axis of the Market .............................................4 Chapter 3: Fibonacci Price Retracements ...........................................................................................5 Chapter 4: Fibonacci Price Extensions ...............................................................................................6 Chapter 5: Fibonacci Price Projections or Objectives .......................................................................7 Chapter 6: Fibonacci Price Cluster Setups (Trade Setup 1) ..............................................................8 Chapter 7: Symmetry The Power Tool (Trade Setup 2) ..............................................................10 Chapter 8: The Two-Step Pattern Setup (Trade Setup 3) ...............................................................11 Chapter 9: Choosing the Swings for Analysis .................................................................................14 Chapter 10: Applying Fibonacci Ratios on the Time Axis of the Market .......................................15 Chapter 11: Fibonacci Time Clusters ................................................................................................17 Chapter 12: Using DT Time Projection Reports and Histograms ...................................................18 Chapter 13: Time and Price Conuence ...........................................................................................19 Chapter 14: Triggers and Indicators .................................................................................................20 Chapter 15: The Ideal Trade Setup ....................................................................................................22 Chapter 16: From Analysis to Trade Entry Putting It All Together ............................................24

Steves Synopsis
This book is a pretty huge disappointment. The vast bulk of it consists of repetitive, fairly uniformative examples, and a very small part of it is useful process. Most of the time and price projections can be summarized as run lots of Fibonacci projections (my quotes). Some of the examples seem particularly contrived because the choice of swings used for a particular projection worked out perfectly, but other swings could just as easily have been chosen (and werent) which would not have resulted in such accurate predictions. The process once its detailed is admittedly tailored for intraday trading. No mention is made of Elliott wave or Gann theory. The only technical indicators discussed (very briey) are the exponential moving average and the Commodity Channel Index (CCI). So, overall, although it contains many example charts, I would consider the book pedagogically weak. Note: I wrote these impressions immediately after having read the book and before I studied the material on the Fibonacci Queen website. While my opinions may ultimately hold, I reserve complete judgment until Ive applied the method for a while and evaluated the results.

Chapter 1: Fibonacci Numbers and the Golden Ratio

Fibonacci Series
! Leonardo of Pisa = Fibonacci (1202) ! Series: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987, ... ! Formula F(0) = 0 F(1) = 1 F(n where n > 1) = Fib(n-1) + F(n)

Golden Mean
! At the limit, F(n) / F(n-1) = 1.618033987... = Golden Mean or Golden Ratio ! Represented by Greek lowercase letter phi (!) ! 1/! = 0.618...

Value in Trading
! Support and resistance levels frequently occur at Fibonacci ratios of previous prices.

Other Ratios
! ! ! ! ! ! ! ! ! 0.382 = (1 - 0.618) 0.382 = (0.618^2) 0.500 = (1 / 2) 0.618 = (1/ 1.618) 1.272 = sqrt(1.618) 0.236 = (0.618 - 0.382) 0.236 = (0.382 x 0.618) 2.618 = (1.618^2) 4.236 = (1.618 x 2.618)

Chapter 2: Applying Fibonacci Ratios to the Price Axis...

Three basic trade setups
! Price cluster setups ! Symmetry setups ! Two-step pattern setups

Tools of the Trade

! Dynamic Trader with an eSignal feed

Denitions
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! Support = price area below the current market where you will look for the possible termination of a decline and where you would consider being a buyer of whatever market you are analyzing. ! Resistance = price area above the current market where you would look for the possible termination of a rally and consider being a seller.

Three types of Fibonacci price relationships:

! Retracements (see Chapter 3) ! Extensions (see Chapter 4) ! Price projections (see Chapter 5)

Chapter 3: Fibonacci Price Retracements

Terminology
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! Price retracement: A price retracement with a ratio less than 100%. Same as an internal retracement in Dynamic Trader terms.

Ratios
! 38.2%, 50%, 61.8%, 78.6% ! Sometimes 23.6% if the swing is very long.

Usage
! Draw from prior low-to-high swing to identify possible support. ! Draw from prior high-to-low swing to identify possible resistance.

Correct Retracements
! General Demonstrates how to shotgun (my term) retracements from multiple swings. See Figure 3-14 on page 23. Performing retracements as illustrated in this chapter seems most appropriate when there is an identiable trend but no clear E-wave pattern. This is supported by the illustrations. ! Low-to-High Looking for support. Take all the preceding lows and retrace to the highest high which is not necessarily the most recent high. ! High-to-Low Looking for resistance. Take all the preceding highs and retrace to the lowest low which is not necessarily the latest low.

Incorrect Retracements
Only consider retracements which end on the swing were projecting from.

Chapter 4: Fibonacci Price Extensions

Terminology
term !

Price extension: a retracement with a ratio greater than 100%. Same as an external retracement in Dynamic Trader terms.

Ratios
127.2%, 161.8% ! Optionally, 261.8% and 423.6%
!

Usage
Run from prior low-to-high to look for support. Run from prior high-to-low to look for resistance. Many moves terminate at or near price extensions or prior swings.

Chapter 5: Fibonacci Price Projections or Objectives

Terminology
term !

Price projection (a.k.a. price objective): unlike retracements which use two data points demarcating swings in the opposite direction of the current price move, price objectives use three data points and project a prior swing in the same direction as the current price movement onto the current price movement. Same as alternate price projections (APPs) in Dynamic Trader terms.

Ratios
! 100% and 161.8% ! The 100% ratio is also used for symmetry. See Chapter 7.

Usage
! Three data points. ! Compare swings in the same direction. ! If a pivot point is not obvious, try going to a higher or lower time frame.

Chapter 6: Fibonacci Price Cluster Setups (Trade Setu...

Terminology
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! Price cluster: The coincidence of at least three Fibonacci price relationships that come together within a relatively tight range. A cluster might consists of three retracements, three extensions, three projections, or any combination of any of these price relationships. ! Trade setup #1: A trade setup based on price clusters. Note that this trade strategy only uses clusters of Fibonacci retracements and projections (along with an actual trade entry trigger discussed in Chapter 14) and does not rely on pattern, momentum, or time.

Trends
! For trade entries, focus on clusters that set up in the direction of the prevailing trend. In bull trends (i.e. higher highs and higher lows), look for price clusters that set up on the buy side i.e. support clusters. In bear trends (i.e. lower highs and lower lows), look for price clusters that set up on the sell side i.e. resistance clusters. ! For trade exits, focus on price clusters that set up counter to the direction of the prevailing trend. In bull trends, tighten stops and/or take partial prots when resistance price cluster is reached. In bear trends, tighten stops and/or take partial prots when support price cluster is reached. Countertrend clusters can also be used for countertrend trade entries, but these are lower probability trades and trading in the direction of the prevailing trade. ! The Ask a 4-Year Old Test to determine trend direction Ask a 4-year old to tell you the trend direction. I prefer calling it the squint test. Were looking for the general trend. There might be areas of overlaps, but the general pattern is impulsive.

Money Management
! Maximum risk (i.e. protective stop-loss orders) A few ticks above/below the extreme of the price cluster zone. ! Trade targets

Trade targets Minimum: 127.2% extension (ExRet) of the swing into the cluster zone Subsequent: 161.8% and 261.8% ExRets from the same swing. Move stop to break-even or trail stop once minimum trade target is reached.
process

Trade Setup #1 Process " Identify the overall trend, bull or bear.
Bull trend: look for support to enter a long trade Bear trend: look for resistance to enter a short trade Run retracements (InRets) Bull trend: lows to latest high Bear trend: highs to latest low Run extensions (ExRets) Same approach as for retracements Run projections (APPs) Bull trend: prior high-to-low swings projected from latest high Bear trend: prior low-to-high swings projected from latest low Consider only running the 100% projections. After all the price relationship have been drawn, eliminate outliers and identify clusters.

$ %

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Miscellaneous
! The examples use 30 min and 15 min charts. So this conrms that price projections work with both intraday and multi-day charting. ! The basic approach is very shotgun-like. Find the pivot point, and then draw loads of retracements, extensions, and projections from previous swings in the hopes of identifying price clusters. Absolutely no discussion of E-wave patterns. ! Identifying the price clusters and eliminating outliers and irrelevant price estimates is somewhat of an art form. ! See Figure 6-28 on p. 93 for an interesting use of price estimates where the swings are precipitous (my term). ! See Figure 6-30 on p. 95 for an example of a price cluster which was completely violated. ! Morale of the story: You should not expect every price cluster zone to hold. We simply want to look at possible trade entries using the ones that do hold, and where we see an actual trigger.

Chapter 7: Symmetry The Power Tool (Trade Setup 2)

Terminology
term term process

! Symmetry: Similarity or equality when comparing swings in the same direction. Also called a measured move. ! Trade Setup #2: A trade setup based on symmetrical price projections.

Trade Setup #2 Process " Identify the overall, prior trend. # Find all the swings within the prior trend (not within an earlier trend) which run counter
to the direction of the trend (i.e. corrections) and which are similar to each other in size. $ Run 100% price projections for each of these from latest high or low. % Symmetry can also be projected from swings in the direction of the larger trend to help determine areas where a trend move might terminate. Use these projections only to help set tighten stops of set targets for an existing trade. & OK, Im a little confused. Didnt we do this as part of the prior trade pattern (price clusters)? Why would we use these symmetry relationship in isolation of retracements? When would we ever use symmetry all by itself?

Symmetry Examples
! In general, use symmetry and price projections to nd where corrections may end and the overall trend may resume, not to nd reversals in the overall trend. The latter may indeed be the case but it should be conrmed by trend reversals on lower time frame charts.

Violations or Breaks in Symmetry

! When symmetry is broken or violated, a high percentage of the time you will see at least a deeper correction or sometimes a more important change in trend. (see Figure 7-19 on page 120).

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Chapter 8: The Two-Step Pattern Setup (Trade Setup 3)

Terminology
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! Two-step pattern: A corrective pattern than can appear after either a bull or bear trend. Completion of the pattern generally signals resumption of the trend. Also known as an ABC correction or a Gartley pattern (an ABC correction with very specic Fibonacci ratios). Called two-step because it has two swings against the prevailing trend. ! Trade Setup #3: A trade setup based on a two-step price pattern. ! Patterns Bullish two-step

Bearish two-step

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Bearish two-step

Image

Key Ratios to Determine Pivot e (i.e. C)

! 38.2%, 50%, 61.8%, and 78.6% InRets of the wave ab (i.e. the last wave of the prior trend) ! 1.272% and 1.618% ExRets of the wave cd (i.e. W.B) ! 100% APP of the wave bc (i.e. W.A) projected from d (i.e. EOW-B) ! Ideally, a price cluster should include one price projection from each of the three groups. ! If other price projections overlap with the two-step projections, the price targets are even stronger. ! So, as you can see, these are the same projections we use to nd the EOW-C in the Dynamic Trading method. The DT method would also have you use the W.5:C projections.

Trend Reversal or Correction

! Usually we consider taking out a prior swing high/low as a signal that the trend is reversing. The two-step pattern runs counter to this thinking since it takes out c (W.A extreme). However, it ultimately also takes out d (W.B extreme). ! To determine if a reversal or a correction (to be followed by a trend resumption) is forming, run the price projections for e (i.e. W.C). If the price holds at these levels, its likely a correction. If price breaks through, its likely a trend reversal.

Initial Protective Stop

! One tick above/below e (i.e. W.C).

Price Targets Following the Correction

! Minimum: 127.2% ExRet of the entire range from b (W.A) to e (W.C). 12

Minimum: 127.2% ExRet of the entire range from b (W.A) to e (W.C). ! Subsequent: 161.8% and 261.8% ExRets of the range of b (W.A) to e (W.C) ! Also make all the standard projections from other local swings to establish the price target zone.

Miscellaneous
! As with any pattern, the two-step setup does not always play out. But, when you see a zig-zag pattern starting to develop, run the price projections.

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Chapter 9: Choosing the Swings for Analysis

Miscellaneous
Very short chapter consisting of a few examples. ! Bottom line: In selecting swings for analysis, choose swings that are of the same dimension or scale as the swing under consideration. ! The author appears to use the standard Dynamic Trader auto-swing feature to identify the swings to use.
!

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Chapter 10: Applying Fibonacci Ratios on the Time Axi...

Running Time Analysis
! Two methods: (1) DT time cycle projections (Fib-T2 and Fib-T3) (this chapter) (2) DT time report (see Chapter 12) ! In this chapter, we focus on a single set of time projections. Clusters of time projections are discussed in Chapter 11. In my opinion, this and the the next chapter should have been combined.
process

Time Cycle Projections Using 2 Points (Fib-Time2 projections)

! Key swings: low-to-low, high-to-high, low-to-high, high-to-low ! Key ratios: 38.2%, 50%, 61.8%, 78.6%, 100%, 127.2%, 161.8%, 261.8% (optionally 23.6% and 423.6%) ! CB uses trading days, not calendar days (which is the DT default) ! Important Note: As illustrated in the examples, just because you select a L-to-L, H-toH, L-to-H, or H-to-L to use in the projection does not mean the projected time targets are limited to lows, highs, high, or lows, respectively. A low OR high swing may occur at any of the projected Fibonacci ratios.

process

Time Cycle Projections Using 3 Points (Fib-Time3 Projections)

! Key swings Low-to-high projected from another low High-to-low projected from another high High-to-high projected from an intervening low (see Figure 10-9 on page 168) Low-to-low projected from an intervening high (see Figure 10-10 on page 169) The last two are pretty unique and are not discussed in the Dynamic Trading method. ! Key ratios 100%, 127.2%, 161.8%. Also sometimes use 61.8% to conrm other ratios. ! Time Symmetry In other words, using the 100% Fib-Time3 projection of a high-to-low and projecting from a subsequent high, or a low-to-high and projecting from a subsequent low. Really just a special case of whats already been discussed.

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projecting from a subsequent high, or a low-to-high and projecting from a subsequent low. Really just a special case of whats already been discussed.

Time and Price Clusters

! A swing has high probability of occurring where both time and price clusters coincide. More on this in Chapter 13.

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Chapter 11: Fibonacci Time Clusters

Terminology
term term process

Time cluster: Conuence of at least three time projections within a relatively narrow time range usually one to three bars apart from each other. ! Time window: a cluster with one additional bar before and after.
!

Process " Do projections, focusing rst on recent swings.

Fib-T2s from previous highs-to-highs Fib-T2s from previous lows-to-lows Fib-T2s from previous highs-to-lows Fib-T2s from previous lows-to-highs Fib-T3s from previous lows-to-highs projected from last low (if trying to determine time of high) Fib-T3s from previous highs-to-lows projected from last high (if trying to determine next low) # Identify clusters where multiple projections are all within three bars of each other. $ Form time window by adding one bar before and after clusters.

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Chapter 12: Using DT Time Projection Reports and His...

process

Process " In DT, identify key swings and create swing le. # Run Dynamic Time Projection (DTP) report on last swing high or low to identify time of
next swing low or high. $ As new highs and lows are made, re-run the report.

Nuances of Timing Work

! The DTP report uses calendar days. So, if a target falls on a weekend, interpret that target as either preceding Friday or the following Monday. ! The author typically runs time projections on the daily time frame and then also on the 45 minute and/or 15 minute time frame. The author doesnt typically run time projections for time frames less than 15 minutes. ! As with price projections, trend reversals are not *guaranteed* to occur at time targets. ! If time targets coincide with price targets, the odds of predicting a tradable change in trend improve. ! You need a minimum number of bars between swings when doing time projections or else the targets will always cluster. Two ways around this: Drop down to a smaller time frame so you have more bars between swings Use only the most signicant time cycle such as 61.8%, 100%, and 161.8%. (You can control this in Dynamic Trader by manually editing the Time Cycle Ratio Sets.) ! If youre doing intraday time projections, use a time frame that divides equally into the trading session without a remainder. Example: If the trading session runs from 9:30 to 4 pm, thats 450 minutes and 45M, 30M, and 15M time frames all divide evenly into it.

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Chapter 13: Time and Price Conuence

Bottom Line
Time and price together are better than either one all by itself. ! I annotated an odd selection of a swing in Figure 13-1 on page 206. Who would ever have thought to use this swing for a time projection!
!

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Chapter 14: Triggers and Indicators

Teminology
term !

Trade trigger: a specic signal to enter a trade once a trade setup (price cluster, symmetry, two-step pattern) develops. A trigger typically consists of a technical indicator, a price pattern, or a combination of the two.

Potential Trade Triggers

Take out a prior swing high/low ! Take out a prior bar high/low Not as powerful a trigger as taking out a prior swing. ! Trade or close above/below a moving average ! Moving average crossover ! TTM squeeze indicator ! Oscillator crossover ! 14-bar CCI crosses above/below zero to the same side as the 50-bar CCI (see page. 240)
!

Ways to Reduce Trade Entry Risk (i.e. Capital Exposure)

!

Typically, set a protective stop at the prior swing high or low. If this results in excessive capital exposure, options include: Use a standard 10- or 15-tick protective stop on all trades. That is, always set the protective stop 10 to 15 ticks (1 tick = $0.01) away from the entry price. Set the protective stop at a prior swing high or low at a lower time frame. Dont enter the trade immediately after the trigger. Instead wait for a pullback (typically 50% to 78.6% retracement of the last swing along with a 100% APP of a prior swing). The author doesnt say it, but I assume you would then use a Tr-1BH/L to enter after the pullback.

The Authors Trade Filters

Filter = additional criteria that setup must meet for entry to trigger. ! For a long trade... Price is above 34 EMA on 3-minute chart Both the 14- and 50-bar CCI are above zero on the 3-minute chart ! For a short trade... Price is below 34 EMA on 3-minute chart
!

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Price is below 34 EMA on 3-minute chart Both the 14- and 50-bar CCI are below zero on the 3-minute chart

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Chapter 15: The Ideal Trade Setup

process

Ideal Trade Setup Process " Look at the 3- or 5-minute chart and identify the pattern.
If higher highs and higher lows, then the trend is up, look for a buy. If lower highs and lower lows, then the trend is up, look for a sell. If the trend is sideways, then stand aside. Run 100% symmetry projections against the trend to identify corrective support (bull trend) or resistance (bear trend) in order to take a position in the direction of the trend. For a bullish trend, project from symmetrical high-to-low corrections looking for support level to enter at. For bearish trend, project from symmetrical low-to-high corrections looking for resistance level to enter at. Wait until the price is on the right side of the 34 EMA. For a bullish trend, price should be above the 34 EMA. For a bearish trend, price should be below the 34 EMA. {As I mentioned above, I think the DTF works as well as or better than the 34 EMA.} The odds improve further when support/resistance is very close to the 34 EMA line. See page 251. Wait until the 14- and 50-bar CCI readings are on the right side of the zero line. For a bullish trend, both lines should be above the zero line. For a bearish trend, both lines should be below the zero line. The odds improve further when the CCI lines show a zero line reject that is, when the 14- and 50-bar lines just kiss the zero-line and then rebound. For a higher probability trade, make sure that the trend on the 15-minute chart is in the same direction as the 3- or 5-minute chart. But, if the price targets have been met on the 15-minute chart, it may be too late for this trade despite the trends being in agreement. Enter the trade using one of the triggers discussed in the previous chapter.

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Typical Mistakes
! Using a trigger that gets you into the trade too far from the support or resistance zone. That is, the trigger has too much lag. ! Setting stops too tightly. ! Setting stops too loosely.

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Setting stops too loosely. ! Taking prots too soon.

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Chapter 16: From Analysis to Trade Entry Putting It...

process

Master Process for Identifying Trade Setups " Identify the key highs and lows from which to run price and time relationships. # Run all the Fibonacci price relationships for possible support and resistance levels
using the key highs and lows that you identied in step 1. ! To set up support for possible buy setups: Run all possible price retracements (InRets) from the low-to-high swings (38.2%, 50%, 61.8%, and 78.6%). Run all possible price extensions (ExRets) from low-to-high swings (127.2%, 161.8%). Run all possible price projections (APPs) from high-to-low swings, projected from another high (100%, 161.8%). ! To set up resistance for possible sell setups: Run all possible price retracements (InRets) from the high-to-low swings (38.2%, 50%, 61.8%, and 78.6%). Run all possible price extensions (ExRets) from high-to-low swings (127.2%, 161.8%). Run all possible price projections (APPs) from low-to-high swings, projected from another low (100%, 161.8%). $ Look for one or more of the three trade setups: ! Price cluster setup ! Symmetry setup ! Two-step pattern setup % Optionally, run the Fibonacci time relationships for added conrmation. ! Typically, run the time cycles from the same key highs and lows that you identied for your price work. ! Time cycles from two points (38.2%, 50%, 61.8%, 78.6%, 100%, 127.2%, 161.8%) High-to-high Low-to-low High-to-low Low-to-high ! Time cycles from three points (100%, 127.2%, 161.8%) Low-to-high from another low, comparing swings in the same direction

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Low-to-high from another low, comparing swings in the same direction High-to-low from another high, comparing swings in the same direction High-to-high from an intervening low Low-to-low from an intervening high ! Look for a cluster of time-cycle relationships and see if it supports any of your price work. A trade setup is still valid even if it is not supported by timing. If the timing coincides with it, however, the odds for a reversal are higher. ! You can run the DT DTP report instead of the various time cycles. & If a setup is identied, look for an entry trigger.

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