Monday, 15 February 2010

Fibonacci, what a lovely name

Leonardo Fibonacci was an early Italian mathematician whose work revealed the existence of ratios in nature that repeated themselves over and over again. The most famous number being the so-called Golden Ration, 0.618 or 1.618.

As traders, we look for more straws to clutch, so we embraced the Fib numbers. One problem, there are lots of them. Which one or ones do you use? If I drew lines on my charts with even the most popular Fib lines, you wouldn't see the bars anymore because the lines would cover everything. So, if you subscribe to the whole theory, you are continually having to make decisions about whether it's 0.618, 0.75 or some other fractions. You are wrong a lot and being wrong a lot takes away the confidence in your methodology. For me, a high win rate is a MUST. I say this over and over again but I believe that without this, it is hugely difficult to become CP.

I start everything from price action. I look for repetitive price action and then try and find a visual that helps me identify it quickly. That's how I started to use the 1.272 Fib ratio. It works on every timeframe I have ever looked at.

The plus for the trade is that if it doesn't work - price keeps on going, I get a continuation trade out of it. Win or Win.

So what do I look for? I need a swing high and a swing low that are far enough apart. Most charting packages have a Fibonacci Extension or Fibonacci Retracement drawing tool. I set this up so I just need to click on the High and Low swing points and it draws a line at the 1.272 extension. I then draw a box with its outside against the line and its inside taking about 8% of the area between the line and the swing low or high it is extending from.

I now have a target. When price gets to the box, I do the same thing I always do at any resistance - I look at order flow and context to see whether it will fail at resistance or break it. The times that it fails, in the ES 1.25 point range bars, there is usually a 3 or more bar congestion around the Fib box before it continues on its way to, often, a large move.

The charts below shows how the tool can find these areas. I draw the box in manually and then wait for the target to be hit.

There was a reminder in Dr Brett's blog here about the value of replay and SIM.

Looking at the historical charts of the Footprint did not really show me much and that was probably why it took me so long to find value in them. It's the watching inside the bar as the bar is forming that I want. See today's Trade 1.

Today's trades. By the way, my smoothed CVD is displayed as delta bars again - I can see it better. It's going to be a short quieter day so I can give a little more commentary today.

If you look at today's Trade 1, you can see I got in a bar earlier. That's thanks to the Footprint Profile. I watched the price around the S&R of the 33/99EMA. The bar made a lower low with selling at the bid. Buying came in at the ask and although the 45CCI was sideways, the 6CCI had hooked, CVD was buyers, VB undecided to weak but if you compare that bar to the previous bar's volume profile which looked similar - the difference is that the bar of Trade 1 closed up while the previous bar closed down. As the bar developed, it was red with selling at the bid but as it closed, in spite of being red below, it finished green with that volume the widest. These are the things I look at inside the bar and this is what should give me a one bar earlier entry. We'll see how it goes.

I entered the trade at the close. Market was gathering steam so I did not scale out at 2 points but waited until the Fib 1.272 at the red line. I exited somemore at the reversal candle outside of the Keltner and watched price retrace to the Fib 1.272 which held while order flow and momentum were positive. Flow weakened but the support held so I did too. We were in Friday's upper mini distribution on the Profile and I watched today's extremes. The high double printed so I was looking for continuation but there was another Fib 1.272 at 2704 from another swing. I'm trading a bit more size and have adjusted my scales to 1/4ths so I exited some more at 2703 with my stop below the low swing point of 2691. The second time at the 1.272 kept my attention. I closed out at 2702 after things went quiet and price failed at the 1.272 the second time. I usually wait for the third try.

Click to enlarge


  1. Tom,

    Would you say that your analysis of context determines if you want to place a trade, in what direction, and how aggressive you want to enter, then your setups determine the "how", with various setups for the different context conditions?


  2. Hi
    here is nice video for basic of ask-bid and in second half nice examples of trades

  3. There were two EMA crosses in the ET this morning. Both were looking pretty good to me except that the short cci was turning the wrong way on the last bar. The short cci trend looked ok but those last bars looked like possible momentum peak/through. Do you take the trade?


  4. Aaron, definitely. It determines possible risk/reward.
    Mpe, if you are talking about the 3 bounces and the a break down just before usual ES RTH open: It wasn't until the 25:56 bar that it was clear - CCI momentum down, orderflow flat, close less than open of bar.

  5. EL, I was talking about EuroStoxx today, Tuesday.


  6. Mpe, see today's post and chart later today. There was a long on the oipen, a short at 9:50, another short at 11:04 so far.

  7. Hi,

    I find that when the candle reverses after making a lower low and closes green, the net delta is usually positive or high offer volume. So I don't fully understand the utility or additional value of the intra bar detail.

  8. Do you respond to negative comments ? I see a lot of "yes" men here.

    Your charts look like a bunch of garbage ( which they all are), and the only CLEAR part of this blog and many like it is that they ALL have underlying sales OR are building up to some sort of SELL or promotion of a product. Aside from that point anyone trading off a chart like the above is .... well you know already I am sure.

  9. Anonymous 13:54, I feel your pain. Sadly, not everyone learns how to become a profitable trader. There are lots of reasons for this. A loser can still turn into a winner with motivation and a lot of work. Going around anonymously posting useless comments will not take you there. Hopefully you will find what you are looking for somewhere else.