Stock Trading With Fibonacci Levels
It's that time of year when I usually put down an article or two
on the topic of rock-solid trading systems. By this I mean those
systems that have a high win ratio, and are particularly
difficult to mess up. These two criteria, of course, make such
systems particularly suitable for beginner traders. Most rock
solid systems are based in one form or another upon the concepts
of support and resistance, and today's subject, trading with
fibonacci levels, is no different.
Usually talked about in the same breath as 'Elliot Waves',
fibonacci lines (or 'fibbos' as the floor traders call them!)
are actually much older, and are nothing more than the
expression of a peculiar mathematical phenomenon that is visible
all over the planet, in almost every area of existence.
Discovered in the twelfth century by Leonardo da Pisa, a crazy
Italian, Fibonacci retracement levels are basically a number
sequence that influence many natural phenomena, and also seem to
be particularly applicable in trading.
Fibonacci retracement levels are the real-world version of these
numbers, and when applied to stock trading charts can give the
trader a huge advantage, highlighting likely points where the
market may pause or reverse entirely. The basic trick is to
realize that after any major price move up or down, the market
usually turns, at least temporarily, as profit taking occurs.
This means that prices will usually retrace a large portion of
the previous move, and guess what? Support and resistance tends
to happen at levels predicted by the Fibonacci levels! So what
are these magic levels, and how do you calculate them? Read on!
Take the distance of the original move (i.e. the distance
between the low and the high or vice versa), and subtract (or
add!) from it the following percentages:- 23.6%, 38.2%, 50% and
61.8%. In other words, if price just ran up 100 points on XYZ
stock from 100 to 200, expect pullbacks to hit support at the
Fibonacci retracement levels of 176.4, 161.8, 150 and 138.2.
You've probably already spotted the problem - how do you
determine where the original move started, and where it ended?
In this respect the subjectivity of Fibonacci levels is akin to
the wave-counting problem suffered by Elliot Waves (was it wave
3? or 4? Or is that actually a super wave??? :-). Never fear,
there is a solution, and a frighteningly simple one. You need to
get consistency in order to apply the fibonacci levels, and how
do you get consistency? That's right - automate it. Rather than
write your own fibbo software, I suggest you head on over to www.fibonnaci.com where all
you have to do is input the symbol you are interested in, and
press a button. It then gives you the latest fibonacci numbers
for trading that stock plus a few bits and pieces. And best of
all, it's free. Seriously. As a Trader's Initiative site, www.fibonnaci.com is run by
traders for traders, so no charges are made for the service.
Why do fibonacci levels works so well? Because they are based on
support and resistance, and as you should already know, support
and resistance are the bedrock of any successful trading system.
Quite frankly, most traders looking at a chart will see pretty
much the same thing - if it looks overbought, it will seem to
'want' to revert to a lower level - not too far and not too
close. The fibonacci levels are a rule of thumb formula for
expressing this 'goldilocks' effect. Can you use it on anything?
Pretty much. www.fibonnaci.com has easy
links for all the stocks of the S&P 500, as well as other stocks
(such as the UK's 'FTSE 100'). There are many traders using it
on forex, commodities and options too - the phenomena discovered
by a crazy italian monk almost a thousand years ago really is
that good!
The www.fibonnaci.com
free version use retracements on price. There are also versions
that use retracements in time, and the charmingly named 'fans'
and 'arcs'. How you decide to trade fibonacci levels is entirely
up to you - just remember to be consistent - don't jump from
time retracements to arcs then fans and expect to make any money!
That's all from me for now - Have a good holiday season, and see
you all next year for a trade-tastic successful year!