Welcome to the Friday edition of FutureSource.com's Fast Break.
Today's author is John Novak, 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 9 years. [more]
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PREDICTING TURNING POINTS WITH FIBONACCI: FACT OR FICTION?
Why determining turning points in advance is important for every trader
In our experience we have found that 100% objective fibonacci price projection and retracement methodologies will give you foresight into the potential upcoming moves in time and price in the market you are currently trading whether you trade a daily chart of Microsoft or five-minute bars in the S&P 500. We would like to take a moment to educate you on exactly how to do this on your own.
Fibonacci Projections and Retracements defined
Fibonacci price projections and retracements are very powerful ratios that can be used as a leading indicator. They use the current underlying structure of the market to attempt to predict where the market may go in the future. Fibonacci ratios are common in almost everything in nature from flowers, to the human body, seashells etc. Our intention is to show you how you can use these powerful ratios to assist you in your trading. The basics of market price action are determined by sup
ply and demand. This supply and demand can be measured in waves or swings with charts and graphs. Elliot wave technicians attempt to predict turns by counting waves and projecting them into the future. The downside and the challenge to this methodology is that Elliot wave is extremely ambiguous and often too difficult for most traders to implement into their trading strategy with any degree of consistency. Fibonacci ratios however are just as, if not more powerful and can be done under a more rigid set of rules. After all, rules and discipline are the building blocks for successful trading. Fibonacci ratios are easy to use and just as easy to calculate. You take the range from one pivot to the next and add or subtract the ratios. Simple. Many traders now use spreadsheets and simple charts and graphs to do basic fibonacci ratios. Some common ratios are .382, .500, .618 1.00 1.382, 1.618, 2.00 and 2.618. These ratios also as they get larger tend to have more exhaustive qualiti
es. Where this takes a powerful turn is when you assemble a "CONFLUENCE" or grouping of these fibonacci ratios in a narrow well-defined area.
Then, when you are able to take that one step further and apply a confluence of ratios from multiple timeframes and multiple areas within the same chart, the confluence area develops into a powerful synergistic area that can be effectively traded to or off of depending upon your personal trading style.
Types of fibonacci ratios that you can calculate
There are 4 main types of Fibonacci Price projections that can be done.
1.Extensions
2.Alternates
3.Expansions
4.Retracements
1. Extensions take the range from point #1 to Point #2 and multiplying that distance by a Fibonacci number, add the two numbers together and project into the future where a possible turning point could be.
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2. Alternates take the distance between point #1 and point #2 and adding that distance to point #3 to give you another type of projection into the future. |
3. Expansions take the distance from the # 3 pivot to the #2 pivot and then multiply that distance by Fibonacci numbers and add that range to the #3 pivot. |
4. Retracements take the distance from one pivot to the next. Preferably a #1 to a #2 pivot and take a portion of that range that is generally 100% or less. Common ratios to calculate retracements are .382, .500, .618, and .786. |
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WE must first label our pivots from which we will work.
Just the basics of a #1, #2, #3 pivot. I have done each of the 1,2,3's in a different color so you can see them as separate. |
We will then grab our Support and Resistance tool in Tradestation and anchor (start it) at the #2 pivot and pull it down to our #1 pivot. As you hold it down you will see your extension values displayed.
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| We will repeat this process for each of our #2 and #1 pivot labeling. Notice we have an area of confluence or a grouping of projections from different levels on the chart that fall into a relatively tight area. |
| We will mark this area with color coordinated horizontal lines to keep our chart clean and move on to Expansions. |
To do expansions we will pull the tool from the #2 to the #3 pivots.
From the white #2 to the White #3 you will see another projection in the exact same window. |
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| Repeat this process for all of your pivots. |
| We color coordinate and now have an unmistakable window of fibonacci projections that offer us a tight window of confluence or grouping at the 1055-1057 price. |
| Now we will back up and look for a retracement that falls in this window as well. Using the top and bottom we are looking for the most exhaustive retracements which one of them happens to be 78.6% retracement. As you will see it falls in the 1158.50 area. |
| Now to do our ONLY alternate due to space limitations, we will use the YELLOW #1 , #2 , #3. To do this we will remove all of our fib ratios from our tool and pull from the #2 to the #1 pivot... we will then slide the tool up to the bottom of the #3 pivot and get a 100% alternate. You can see that this also terminates in our KEY window of potential resistance. |
We now have 8 fibonacci projections and retracements that fall within a tight clearly defined area. If you where long you would look to exit your position in this window. If you are a counter trend trader or swing trader you would look to initiate a short position in this window.
That is how you use fibonacci ratios to predict potential turning points in the market. This becomes even more powerful if you have a confluence of ratios using a 1, 3, 15, 30 minute chart that all fall into the same window.
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Automation of this entire process
Now this is a very powerful setup. Yet, the question remains, "can this entire process be fully automated to alleviate this massive amount of analysis?"YES!
We have done just that with the T-3 Fibs ProTrader software. Not only is this entire process automated but this exact analysis is done on up to 50 timeframes that are " synthetically" built by the program - weighted - ranked and then shown to you in an easy to read RED LINE (resistance) or BLUE LINE (support) on a single chart.See figure below for an example using a one-minute Nasdaq futures chart.
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| This setup is equally effective on Forex - S&P futures - Stocks and Bonds. Below is an example of a 233-tick chart in the E-mini S&P futures. |
Nexgen Software goes well beyond just offering a Fibonacci support and resistance tool. We specialize the training and education of the software - supply additional indicators to help with entry and exit techniques and timing and run a live educational trading room in Hotcomm for all users of the software showing all the possible setups using the program until they are comfortable using the program on their own.
For a free demo of the software or just to watch our educational videos you may visit us on the web at http://www.nss-t3.com
Nexgen Software may also be reached by phone at 281-419-2110 during trading hours.
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About
the Author
| John Novak , President of Nexgen Software Services Inc. 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 9 years. He has devoted the last 6 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 educational work on analysis in predictive indicators for traders. |
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Disclaimer
The Commodity Futures Trading Commission has asked us to also advise you that trading futures is not without risk. While there is opportunity for incredible wealth building, there is also the risk of losing even more than you invested. Of course, that's not unlike most other businesses. But informed traders are the best traders! Opinions expressed by Fast Break authors are not those of FutureSource.
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To be successful you need 3 things: 1. A distinct advantage over the market. 2. A plan to profit from that advantage. 3. The Discipline to follow that advantage.
-John Novak
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