FIBONACCI The name’s Leonardo, but these days they just call me MONEY. MO NEY. Word? Word?
IN THE
Leonardo Fibonacci
MODERN AGE
PUBLISHED BY
BOBOKUS.com
BOBOKUS.com
REMEMBER
“Support and Resistance levels either hold or they don’t” - Je Sorrells (Bobokus)
INTRODUCTION
Fibonacci - Magic, Myths, and the Market
The use o Fibonacci or analysis o various nancial markets is very common and widely practiced. In act It’s one o N O I T C U D O R T N I
the most commonly used trading tools, but to the new trader it’s one o the hardest to understand. The modern age o inormation and the mass delusions resulting rom some o this inormation, only make it more dicult to understand and actually apply this tool in a new traders arsenal. There are Fibonacci retracement tools, Fibonacci expansion tools, Fibonacci arc tools, Fibonacci an tools and Fibonacci grids. Most o the inormation you’ll nd while searching the Internet will attempt to make you believe that Fibonacci is magical or there is some mystical use behind them, because Fibonacci can be ound in nature. I’ll say this now so you can orget all o the mystical and magical properties o using Fibonacci in the markets ... “It’s all rubbish”. There is no magic or mystical properties to using Fibonacci in any type o trading, it has absolutely nothing to do with magic but everything to do with helping you make a business decision while trading. I personally use the Fibonacci retracement tool and have no use or the other Fibonacci tools mentioned earlier. There is no need to use the dierent tools to accomplish the same goal o being protable in the markets, we want to keep it simple. The Fibonacci retracement tool is just that, a simple tool to make an analysis rom. There is no dierence in using the Fibonacci retracement tool over a moving average. Just because many traders use a cer tain moving average doesn’t make the moving average magical, the same is true with the Fibonacci retracement tool, just because many traders use the tool it doesn’t make it magical either. How many times have you heard that the use o Fibonacci junk and when it works it is just because it’s a sel ullling prophecy? I see and hear this a lot and it’s kind o unny to hear traders say that. The only thing I can gather rom this is that they have tried to use Fibonacci and ailed. Being human we all want “We have traders thinking that the market to be this cut and dry do this and do this and you’ll be proftable, but it doesn’t work that way. The other side o the coin are the ones Fibonacci contains some magical preaching the magical qualities o using Fibonacci. Who’s right? or mystical qualities, they are the
same ones looking or the holy grail We’ll rst look at the ones saying that the use o Fibonacci is a sel ullling prophecy. The thinking is that the use o Fibonacci is so widespread it will or perect trading system that will provide common entry and exit points shared by all those using the same work in all market conditions and is tool. To a small extent this has validity, it is sel ullling to a degree, but that easy as sitting in a lazy boy recliner doesn’t mean we can all trade and be 100% correct on all o our trades. Its with a remote watching TV.” not that it’s a sel ullling prophecy, but more along the lines o mass ullling, you can just orget the prophecy part since this would imply magical qualities that don’t exist. Many o the traders that have tried and ailed with the use o Fibonacci didn’t expect any ailures in their trades. Once it ails they jump to the conclusion that it doesn’t work because it either didn’t hit the target to the exact number, it didn’t bounce, or wasn’t rejected rom a level to the exact number, so it must not work. The use o Fibonacci was never meant to work to the exact number, the problem with this view is simply a misunderstanding o the markets and how they work. You have to remember that there are humans that are buying and selling around the Fibonacci levels or and that not everyone will be entering and exiting at the same point. Not only that, there is also a problem with retail brokers who don’t have the same chart data so you’ll nd dierent variations rom broker to broker. The result o all this is what I call slop in the market. Even though many traders are using the same tool and looking to buy and sell at the same points, these points can vary anywhere rom 10-30 pips or even more sometimes. There is nothing that can be done about this, it’s just the way it is and we as traders have to deal with it. On the other side o the coin we have traders thinking that Fibonacci contains magical or mystical qualities, the same ones looking or that holy grail or perect trading system that will work in all market conditions and is easy as sitting in a lazy boy recliner with a remote watching TV. I guess it’s actually a good thing that there are traders with this mentality because someone has to loose in this game and it may as well be them. I applaud those holy grail traders or their persistence i n donating to the markets. I hope their quest or the holy grail continues or years to come. Now i you are just starting out in this business do not ollow that path, it is paved with pain. Thinking that Fibonacci is magical because we can nd it in nature and elsewhere, so it will also work on nancial charts and will even hit to the exact number specied, is just silly. “I I could just nd that secret way that they are used I’ll be r ich.” This in itsel is unny, there is no secret way they are used, once you start coming up with your own wacky way o using them…you are the only one using them that way. You are no longer trading with the big money traders and the banks. To be successul in trading you simply have to learn to see the market you are trading with a logical ramework, instead o searching or the perect combination o indicators and holy grail systems so you don’t have to learn how to trade. Isn’t it better to use what has been working or years and years instead o some new “holy grail system.” It isn’t the complicated systems or methods that work, it’s the most simple and basic o tools that can help you become successul. For some odd reason learning how to use the simple tools becomes something no one is willing to do. The simple things like basic support and resistance and trend lines are all that’s really needed. Fibonacci is just a way o displaying support and resistance points in the markets. Learning to trade is no dierent than learning anything else, take a musical instrument or example, everyone can learn how to play one but very ew will ever actually be any good at it. The same is true in trading, 4
anyone can learn, but not everyone will be good at it. Some will pick it very quickly others may take years to learn.
N O I T C U D O R T N I
The rst thing I try to teach my students is basic support and resistance, its very simple in concept, but because it is so obvious and simple most ignore the act that it’s the most successul route to proft.Support and resistance is nothing more than points in the market where we see the market change direction. These are the natural support and resistance points. Figure 1 is an example o natural support and resistance points created by the waveorms price makes.
I didn’t mark all the resistance points in gure 1, I just wanted to point some o them out so you have an idea o the naturally created resistance points. In the next chart (Figure 2) suppor t levels created by price movement are marked.
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N O I T C U D O R T N I
In Figure 2 I also didn’t mark every single suppor t point, I just wanted to show some o the support points s o you can understand where they are. You’ll notice in Figure 2 that support levels continue to be broken and the down trending continues. Good trades will come rom price breaking through a previous support or resistance point. Trading the break o support and resistance levels is a trading method all to its own and very common, but we are not talking about break-out trading here. Understanding this basic concept o support and resistance makes learning to use the Fibonacci retracement tool easier. Fibonacci retracement levels and extensions are just a way o viewing support and resistance to project ahead o price where the next points may be established. Once again it has nothing to do with magic. I’ve used the ollowing analogy oten. It’s a simple wholesale/retail mind set, where you buy at a wholesale price and sell at a retail price. The Fibonacci retracement tool is just a way o looking or the wholesale price to enter the market at the inner retracement levels and also to display the projected retail price in the orm o the extensions. I n Figure 3 I’ll demonstrate the inner levels (wholesale region) and the extensions (retail region)
The wholesale region is the inner levels o the b tool since they are in between the high and low point placed at the high and low o the waveorm being measured. The Inner levels are the 23.6, 38.2, 50, 61.8 and some will even use the 78.6 inner level. The object here is knowing that price is moving down in this downtrend and i we wanted to enter, instead o entering blindly, what would be a good price to enter short and trade with this trend? The inner levels give us the points o the wholesale price once price does retrace to these points. Now that we know what the wholesale prices are we want to know what the retail price is or us to target in this trade short. The extensions o the b tool represent the retail value o a trade short rom the inner levels and become our targets. I know some o you may be saying we’ll isn’t this backwards and the answer is no, in Forex this principle works in both directions. Had this been an up trend and price retraces to the inner levels we would be entering long at the inner levels and targeting the ex tensions above the 100 level instead o the extensions below the 0 level in a shor t. In Figure 4 we see the reverse o this in an up trend.
Charts Continue On Next Page - >
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N O I T C U D O R T N I
As you can see it’s a very simple concept. Another thing to learn about using the Fibonacci retracement tool are the 2 dierent ways they are applied to the charts. The rst is measuring the waveorms that develop rom these natural support and resistance points created as price moves. In Figure 5 this is applying the b tool to price movement.
The other method, which is just as popular, is applying the b tool to a specic time period (monthly, weekly, daily). In this type o strategy you’re simply measuring a period o time to project into the same amount o time ahead o price. Figure 6 is a representation o placing the b tool based on a time rame o 1 month. The vertical dash lines on the chart represent the beginning o each month so you’re simply looking or the high and low point between these 2 points.
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N O I T C U D O R T N I
Next we’ll cover some o the basic rules o using the Fibonacci retracement tool. First let’s make sure you understand what the numbers on the levels represent. The 100 level and the 0 level you simply place at the high and low points o pri ce that you want to measure with the tool. Next is placing the tool in the correct way and its very simple. I price is moving down you start at the high point and pull down to the low. I price is moving up that you want to measure you start at the low point and pull up to the high point. The reason or this is the way the tools levels are displayed in a percentage. In Figure 7 we pull the tool across price movement that is going up and rom the hig h point we want to know how much price retraces in a percentage o the total amount between the high and low point. In this case we see a very common 38.2% retracement and price (bounces).
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In the next example Figure 8 we measure price that is moving down, but his time price retraces past the inner levels retracing more than 61.8% which is a sign or a reversal o direction.
N O I T C U D O R T N I
Which brings us to another general rule while using the Fibonacci retracement tool and that is the less price retraces the stronger the movement prior to the retracement is. The more it retraces the weaker the previous direction is and retracing more than 61.8% is an early sign o the market possibly reversing. So as you can see the Fibonacci tool is really very simple to apply and use, maybe you have a little better understanding o what its levels actually mean and how you can apply the logic to using them now.
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FIBONACCI FRAMEWORK
Set Up Your Fibonacci Framework And Trade It
I’ve had many traders ask why I use multiple b tools and the answer is very simple, it goes back to the basic principle that the Fibonacci tool is way o displaying support and resistance points. Well when you think about that or a second, i you’re only using one tool, is that tool showing support or resistance levels? Don’t know the answer? See i you can gure out why more than one tool is needed in the next ew examples. In these examples I don’t have the 23.6 or the 78.6 inner levels since personally I don’t use them or base trade entry’s rom those points. Here a movement up in price is measured and once price retraces, we see that the support levels rom this move up initially hold.
K R O W E M A R F I C C A N O B I F
Why did price go short ater it made the bounce rom support then not continue up? Let’s measure the retracement that occurred and where the bounce rom support occurred to see what we nd.
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What we nd now is that ater measuring the retracement that occurred we’ve generated resistance levels to price that it must break in order to continue up rom the bounce. In this case the resistance levels created by the retracement o the move up hold price and its levels become selling points based o the price action ater price tests its resistance levels. We see that Fibonacci can be used to draw a picture o suppor t and resistance levels in relation to current price and the use o a single tool will only give you a one sided view o the support and resistance points to price. So now let’s apply this to a chart and nd the support and resistance levels in the market currently. To start we want to get the bigger picture and begin with the higher time rames. Let’s establish the overall trend which we nd with the Euro is an up-trend. Since price is moving up we can apply the support levels to price by placing a b on this movement we now can see the support levels in Figure 11.
K R O W E M A R F I C C A N O B I F
In Figure 12 we simply add the resistance levels to the retracement that has occurred and we have both the major support and the major resistance levels in relation to current price rom the Monthly time rame.
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As you do a top down analysis in your charts, each time rame will be measured in the very same manner just on a smaller scale, so you simply ollow this procedure until you get to the time rame you want to trade rom. The reason you need the higher time rame levels is that the higher the time rame you’re drawing them on, the more signicant its levels are compared to the smaller time rames. From here you simply move to the Weekly then the Daily, the 4 hour and down to the 1 hour time rame i you choose. Just remember the lower the time rame the less accuracy and the more market whip you have to contend with meaning the more alse signals you will get. This is your Fibonacci ramework which can now be traded rom. As you spend time in the market your ramework becomes your market lens and you know ahead o time how the market is likely to behave within your ramework.
K R O W E M A R F I C C A N O B I F
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EVOLUTION OF A TRADER
Now that you have a proftable trading ramework it is time to BECOME a trader...
Welcome New Trader, Please Leave Your Money At The Door There is a common misconception that traders have and it is ueled and then ed on by the trading industry, or more specically those in the industry that make their living not rom trading, but rom selling alse hope to traders. A large portion o new orex and equities traders are under the impression that it is easy to be a trader.A quick google search on various trading related searches will quickly make you realize how so many are led astray and believe it is as easy as the marketers proclaim. I recently came across a post on a prominent traders orum, the question rom the poster was this (word or word): “Hey Guys, There Is A New Forex Trading Robot - ______.com, anyone hear o them?” I’ve omitted the address, but I did go to the site and shockingly (*sarcasm) it was no longer there. There seems to be a bit o debate online, in paranoid circles, on whether or not we should be araid that robots will one day take over our jobs, then eventually the world. Well I don’t really have much to say about that, but I can tell you that i you ever see anything about a Forex Trading Robot, you should be araid. Grab your money and run or your lie! The sad act that people actually pay or stu like this makes it all the more easy or those with negative intentions in the industry to continue eeding naive new traders counter productive crap and downright scams.
The Web o The World Wide Web The age o easy access to inormation now seems to have a negative fip side. The same easy access that can sometimes seem like a godsend, also allows a pile-on o bad inormation or content o little value which can lead you astray. Many older traders did not have to go through this as they were mentored by another successul trader or orced to learn through long tiresome study o charts and the live market. The common path or an aspiring trader these days is to pop open their web browser and begin searching or inormation to apply immediately in their live account. The problem is that their search oten leads them to destinations which are inected by viruses o bad ideas, negativity, indicator obsession, and other road blocks to “The problem with this new ound lead the knowledge seeker o their path. Even many o the books sold these easy access to inormation, at days are lled with recycled concepts or hacked together strategies which least when it comes to the trading the authors do not even use. The problem with this new ound easy access to proession, is that trading remains inormation, at least when it comes to the trading proession, is that trading a discretionary feld, their is no clear remains a discretionary eld, there is no clear path to success. The problem with this new ound easy access to inormation, at least when it comes to the path to success.” trading proession, is that trading remains a discretionary eld, there is no clear path to success. There is no series o text books and exams that will graduate you as a trader. The same easy access to inormation that may be a godsend or other elds o study, can be a curse in our proession and might even make it harder to achieve success than it was 20 years ago. Add to this the continual barrage o sites with guru’s who uel the idea that trading is easy, then nancially eed o those same people they have sold this idea to. At the end o the day what many o them oer is a gross misrepresentation o what it takes to trade or a living. Trading is ar rom easy. You know you have become a good trader when your are trading with protably with ease, but that does not mean it is easy. At a cer tain point you will be at a stage where you are calm and at ease when entering and exiting trades, but the reality is it is still hard work and must be treated as a career.
R E D A R T A F O N O I T U L O V E
The eect o much o the bad inormation you come across is that it leads many traders start o overly optimistic. Now don’t get me wrong, having a positive attitude and being optimistic is a great thing, but not when the oundation or your optimism was built to crumble. Would-be new traders start by jumping right in to the live market ater getting a hold o some set o indicators or “secret” set o moving averages and they are quickly punished or their naivety. Being led astray is not the ault o a new trader, In act many now successul traders went through this learning process. It only becomes your ault i you continue to allow yoursel to be led astray. A break rom this cycle, and your rst step back on the road to success, comes when you realize that the majority o those piling on this i normation will not help you nearly as much as you can help yoursel. You help yoursel by beginning to think or yoursel and accepting the reality that you cannot just decide to “Be” a trader, rather you have to decide to “BECOME” a trader.
BECOME A Trader The aster a new trader can make the mental shit to “I am going to become a trader” the aster they will get to the goal line where you can say “I am a trader.” To be a trader is easy, all you need is an account with money in it then you enter the market and start trading. To become a trader is more work. Becoming a trader involves you going through an evolution rom the starting point o little knowledge to the point o having a tradable ramework, knowledge o the behavior o the market you trade, and a cool head while taking wins and losses. To Become a trader you must:
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THE STEPS TAKEN TO BECOME
A TRADER
Begin With Humility Emphasize Equity Management Create Your Market Lens Operate Like a Surgeon Maintain Your Mind Expect The Unexpected BEGIN WITH HUMILITY This is very important when you are starting your trading career. You must come to terms with the act that you are a small sh in a big ocean. The big sh will happily enjoy you as a little snack. When you enter the Forex market most o the liquidity is coming rom big banks and experienced traders. Don’t or a second start o by thinking that it will be easy to take these big traders money out o the market. What you have to learn is to swim along side the big sh, catch the same currents they do, don’t swim against them or they will eat you up in passing. A unny misconception is that these big traders must have access to some holy grail strategy or use some secret indicator, but this is plain and simply not true. Online you can nd access to daily bank analyst reports on currencies. Analysts at the biggest banks in the world generate these reports which are then sent o to their trade desks or the banks traders to consider. In these reports you will nd simple, but proven technical analysis techniques - most commonly horizontal support/resistance, identication o trading ranges, Fibonacci, and undamental themes. Begin by accepting that the other participants are highly experienced in the market and then learn to trade like them. They make money because o experience, not because they hold a holy grail or secret indicators.
EMPHASIZE EQUITY MANAGEMENT It is crucial that as a beginning trader your emphasis is not on how much you can make, but rather how you can properly manage what you have. This is most likely to be the downall o traders. It would be common place to see a starting trader risk their entire account on one or two positions. This is not the way to a sustainable trading career and this is not how the proessional traders you are up against in the market manage their risk. At some point in your trading career you will likely have a string o bad trades. A reasonable number might be 10 losing trades in a row. Are you managing your equity in a way that you can survive this? The solution is using simple ormulas to calculate your maximum risk per trade and total risk in the market at any one time. Doing this is not dicult, but you must have the discipline to ollow through with it on each and every trade.
CREATE YOUR MARKET LENS
R E D A R T A F O N O I T U L O V E
Many ail to realize that when you open your charting sotware and pop on the latest hot indicator or charting tool you’ve heard works so well, you are extremely unlikely to see much success rom it. This is because an indicator on a char t does not provide you with a market lens to trade rom. Your market lens comes rom experience. It comes rom knowing how the market behaves around your chosen ramework. There are many traders that are protable with various indicators or tools such as bs, pivots, price channels, etc. But the tools they have chosen are not what is making them protable. A common theme between successul traders is that they have the experience o seeing how the market behaves around their chosen tools and ramework, day in and day out. The only way to achieve this is to stop jumping between tools and select those that are based on logical reasoning, understand how they work, then spend time in the market experiencing them.
OPERATE LIKE A SURGEON It should be your goal to take your pips out o the market with precision, the same precision a surgeon must use with his scalpel. Traders who don’t treat each trade as a business decision by calculating their risk and dening entries and exits, open themselves to big losses when a trade goes bad.
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Once again it is a novel concept which you will hear again and again, but or some reason it is dicult or many traders to exercise the discipline to ollow a plan or each trade. Instead what oten happens is what I call the “Lazyboy Trade.” The trader sees a potential set-up, Decides on some arbitrary sum to buy with a quick guesstimate, then carelessly gets in the trade without analyzing risk and having an exit strategy. The Lazyboy Trade may work out a ew times solely because o luck, but eventually the trader wakes up rom a nap to nd themselves under water in a position and that’s the end o their trading career. Now there’s nothing wrong with trading rom your Lazyboy, but be sure you never partake in the Lazy Boy trade and you must exercise discipline each day to keep your account healthy.
MAINTAIN YOUR MIND Entire books have been dedicated to the subject o psychology and its role in trading. That doesn’t mean they are all going to help you, but you should take this as a sign that the subject is not to be ignored. Like a proessional athlete must maintain their tness at a level that allows them to compete at the top, we must maintain our mind because it is relied on each and every day to trade at the top o your game. This comes down to a ew things. First you must understand the role psychology plays in trading. Second you must make it your aim to never stop learning. You cannot get yoursel to a certain level and then become complacent. Your entire career in this industry will be a learning experience. Until the day you stop trading you must be prepared to learn lessons rom the market and be willing to do R&D and testing o newly gained knowledge, just as a business would Invest in R&D.
EXPECT THE UNEXPECTED I’m writing this at the end o 2008 which has been quite a wild year in the markets. We’ve seen bank runs ollowed by bailouts, brokerage bankruptcy’s, government intervention in ree markets, housing bubbles exploding, and a global deleveraging o the nancial system o historical proportions. At the beginning o the crash it seemed like every other week the market was being saved by rumors o Warren Buet buying out struggling companies. Now we see pundits questioning the savvy o the oracle himsel as he loses large sums on the same derivatives he once cri ticized as a bad idea and sees his prized AAA credit rating or Berkshire being threatened. Did anyone expect to see that? These are indeed interesting times, but there is one thing every investor needs to learn. Expect the unexpected and do not get wrapped up in the euphoria o those around you. There will always be bubbles, crashes and threats to your protability, but as long as you maintain and objective outlook and think or yoursel you will have a east when there is amine or those who are caught up in the hype.
O M By putting in the eort to BECOME a trader you allow yoursel the opportunity to one day evolve rom saying “I am going M to become” a trader to “I am a trader.” And that is the ultimate reward. Y _____________________________________________________________________________________________________N O N To say “I am a trader” is a great privilege and achievement, it means you have done something that around 95% o those S E who tried could not. C O Congratulations to those who can make this statement and or those just beginning this journey start your evolution by R allowing yoursel to BECOME a trader. E
Allow Yoursel To Succeed
R E D A R T A F O N O I T U L O V E
BOBOKUS TRADE KINGS CLUB In the Trade Kings group here at Bobokus.com we go into much greater detail o using Fibonacci and more advanced strategies o applying them to trading. We also expand into other logical methods o trading and ormat our education in a way that short term and long term traders can learn to prot. We hope one day you will join us and we can help advance your trading into the next level. - Je Sorrells Forex Trader & Founder - www.bobokus.com
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