Using Fibonacci to manage your trades efficiently
In the early 1200’s, an Italian mathematician Leonardo Pisano Fibonacci uncovered a secret about this ancient civilization that would revolutionize the entire mathematical world... including the financial markets!
While studying the Great Pyramid in Egypt, Fibonacci made a startling discovery and uncovered a unique mathematical sequence of numbers that changed several theories of trigonometry, algebra and geometry.
He developed the famous Fibonacci sequence of numbers, which simply says that the third number is effectively the sum of previous two numbers: 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, and so on.
These ratios developed by Fibonacci actually go back thousands of years to the time of the Egyptians and the Greeks. In addition to mathematics, they also used the ‘Golden Mean’ in architecture and music.
Subsequently, these ratios have become the foundation of many effective trading systems, but the truth is they are seldom used properly. And ironically, though it is one of the most effective tools of technical analysis, it is also the most misunderstood.
These Fibonacci ratios can accurately anticipate when the market makes a major turn and identify key turning points for tops and bottoms... only if you know how to read them correctly. If you can learn to use them correctly, you can increase the probability of profitable trades and minimize potential losses.
Fibonacci ratios can be divided into four main groups:
• Time zones
In Sniper Club, we are using Fibonacci Retracements.
Price always moves in waves and we can use the Fibonacci retracement levels to identify possible levels of support/resistance. The Fibonacci retracement is calculated by taking two extreme points (the swing high and swing low) on the price movement and dividing the vertical distance by the key Fibonacci ratios. Once these levels are identified, horizontal lines are drawn and used to identify possible support and resistance levels.
The basic use of Fibonacci retracements is to find potential levels of support or resistance “behind” the market. The standard ratios used in the Fibonacci retracements are: 61.8, 50 & 38.2.
This is an example using Dow Futures contract (YM) as at Friday (7 September 2018).
After an impulsive move, price retraces to buy cluster of Fibonacci retracement levels. Traders by now should park their limit order at the respective buy clusters with the proper money management, at the same time, prepare to take profit from their traded positions with the best risk/reward management strategy.
This strategy churn out 80 tics profit in an hour. In some software, you can place your trades and let the trades play out without watching once you enter an "OCO order".
Fibonacci work well with all time frame. The example above shows a Daily chart from SiMSCI (Singapore MSCI). When the price traded to 261 of Fibonacci projection level, buyer start to take profit at this level, at the same time, seller came in to short the market.
Since this is a daily chart, do have the right expectation that profit will take some days to arrive into your account.
The first short signal came at 26 Jan 2018 and profit taking only came 8 trading days later.
Price came back up to 261 of Fibonacci projection level once again, this time, it was rejected by a 'shooting star" on 3rd May 2018. Profit taking on 16th Jun 2018, 31 days trading from entry.
Be committed and confident when you place a trade!
By committing to the trade completely before you even place it, it means you’re identifying the trade, placing the orders and walking away with very little monitoring. It also means being at peace and avoiding the emotional ups and downs that come with watching your trades as they are live. It means walking away and letting the market ‘do the work’ whilst you do something more productive or fun. It means removing yourself from the temptations of chart-watching and getting influenced by chart whipsaws from news releases, short-term volatility and so on. In short, it means setting and forgetting!
By understanding the mental advantages of set and forget trading, perhaps you will gain a deeper understanding of its power and begin trading this way sooner. (This is especially important to traders who are doing higher time frame)
Have a nice weekend and a fruitful trading journey ahead.