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] |
Trading Fibonacci Confluence - As Easy as ABC?
Every trader with any experience has heard about Fibonacci levels. Many traders have tried to use them, but like many technical indicators that work well in theory, Fibonacci levels pose a challenge when you're actually trying to make money with them.
Manually creating Fibonacci levels (which you can read more about in "High-Tech Fibonacci") presents two problems. The first is created by the series of Fibonacci lines that can be drawn at each significant turn or pivot point: after a stock has zigged and zagged a few times, the resulting pivot points create a cacophony of Fib levels that can render a chart unreadable.
Secondly, the intra-day trader often uses more than one time frame--such as a one-minute, three-minute, five-minute, 10-minute, and 30-minute chart--in making trading decisions. The end-of-day trader may also use 60 and 90-minute time frames as well as daily and weekly data. By the time either of these types of traders have drawn Fibonacci levels for each pivot point in each time frame, both often have a real mess on their hands.
The Nexgen Solution
John Novak made it a personal goal to solve this problem and to see how effective Fib levels could be in trading. More than four years and a number of different program versions later, they finalized the solution. It was the program they called the T-3 Fibs Protrader that automatically identified and plotted significant Fibonacci levels using 40 different time frames and major pivot points from each (see figure 1). These confluence levels allowed traders to see where a stock, future, commodity, or currency had the greatest probability of pausing or reversing on intra-day charts.
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Figure 1
Figure 1 above is an Intra-day chart of the S&P 500 E-minis (ES) showing computer T-3 Fibs Protrader generated confluence levels. The greater the number of lines appearing on the chart, the more significant the level is.
After spending literally thousands of hours observing equity movements, especially at confluence levels, Nexgen Software's developer began to notice a regular price configuration. John Novak called it the an ABC pattern, which he defines in simple terms: "It's a stop run of the first pullback after an aggressive move to the upside that signifies more potential in the direction of the larger move."
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Figure 2
At the beginning of an up trend, for example, the equity would make an aggressive move to an extreme pivot point "Ext" in figure 2) outside its trend channel. This type of action was often a signal that a new short-term trend was being established. After putting in an extreme pivot point outside the trend bands, the price would then backtrack a little and put in a pivot that he labeled "A." Often, the price would then resume the original up trend to not put in another extreme pivot outside the bands but a high pivot inside the trend channel bands. Again the equity would backtrack to "stop-out" the A buyers putting in a C pivot before the up trend resumed.
In the next figure you will see the expected outcome of a successful ABC setup.
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| When pivot C occurred at or near a Fibonacci confluence generated by their T-3 Fibs Protrader indicator, it was a good place to make a conservative long trade with the trend (see figure below). |
Figure 4
The position would be exited when either another extreme pivot appeared outside the trend bands, another pivot formed inside the bands, or the price would fail to take out the C pivot which would trigger a reversal at what Nexgen has called an ABC failure, which is nothing more than a continuation of the current trend. See example below. |
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More aggressive traders could take counter-trend trades dictated by their experience and size of trading accounts. In the above example, a short from the B pivot at a Fib confluence level would be considered counter-trend and therefore higher risk.
"One of the things that most traders do not realize is that you will have an opportunity to not only trade the entire ABC pattern but a vast majority of the time you will be as or more profitable when you trade all the combinations of the A pivot, the B pivot and the C pivot with the overall trend," says Nexgen.
Computerized KISS
Trading doesn't have to be complicated. In fact, the best traders have all learned how to KISS--to keep it straightforward and simple--before they truly succeed in the trading game.
But who says traders can't use effective (albeit complicated) formulas if their computers do most of the grunt work for them behind the scenes? Even when there are thousands or even hundreds of thousands of calculations occurring with each new price movement, signals are as easy as ABC for the trader with the right tools and know-how.
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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 doing educational work on analysis in predictive indicators for traders.
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For
Our Fast Break Readers
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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