Live Fibonacci Trading
John
Perhaps the best thing about trading the futures markets is the ability for participants to profit from trends. Strong moves in price offer beneficial risk versus reward ratios and provide an opportunity to realize extraordinary profits. One way in which active traders pursue profits via trend trading strategies is through automated Fibonacci trading.
Credited to Leonardo of Pisa in the late-12th century, the Fibonacci sequence is a mathematical formula with boundless applications. It is comprised of the following progression of numbers: 0, 1, 1, 2, 3, 5, 8, 13, 21, on to infinity. The pattern is simple, as each number in the sequence is the sum of the previous two integers.
More involved is the golden ratio (1.618033), which represents the proportionality of one Fibonacci number to another. Accordingly, Fibonacci sequence trading involves various technical tools, including Fibonacci retracements, extensions, and expansions.
So what are Fibonacci retracements? Simply put, they are a set of measurements derived from the golden ratio that may be used to place price action into a manageable context. This is accomplished by measuring the distance from a periodic high to a low and then applying the specific retracement ratios to the aggregate value. Typically, calculations are done automatically via a simple retracement calculator.
In addition to these values, traders often add the 50 percent and 78.6 percent retracements to their calculations. Though not technically a part of the golden ratio, the Fib levels 78.6 percent and 50 percent come standard within the functionality of the best Fibonacci trading software suites.
The beauty of Fibonacci tools is that they may be easily applied in live market conditions. Most software trading platforms offer automated Fibonacci trading indicators that feature drag-and-drop functionality.
However, a word of warning: Capitalizing on the power of free Fibonacci trading software involves judgment. Accurate calculations rely on the proper time frame, wave count, and ideal peak-trough values being chosen. Ultimately, learning how to apply Fibonacci technical analysis properly requires time, experience, and additional education.
Although Fibonacci retracements are powerful analytical devices, they are not the only technical tool out there. Like most other indicators or studies, retracements are best used within the framework of a comprehensive trading plan.
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I came across this Fib trading strategy a short while ago and have been playing around with it for a few days and must admit it is very interesting. It's presented in a 45 min video that is interesting in itself for some of the concepts on Fib and Strategies in general.
At the start of the vid he says that the strategy is in the second half and to skip forward if you want but don't because there are points of interest throughout and he doesn't spend much time explaining Fib anyway.
The key is the systematic approach to quite a simple plan and the entry signal is a sign that larger traders are looking at the same thing. I've not properly backtested it but playing around it looks quite sound. There are many times when the criteria aren't met which is fine because you're not entering those anyway. In the pics below I found 1 day that had 5 entries all of which came off though admittedly some entries were triggered while still in the previous trade and the last entry of the day carried over night and nearly stopped out and actually just missed the target the next day by a couple of pip but the risk reward ratio is set at 1:3 so hey.
The entry signal bars are boxed in white, the chart is the 5 min EURUSD but the system looks like it may work on any time frame. I took the signal as a wick or body closed on or very close to the 50% and was followed by an opposite colour bar. Entry was on that bar close.
A few have may have seen the video explaining this strategy by now so I shall say why this strategy impressed me and I must say not many strategies found on the web do but this one is different, here's why.
But that's not quite true either, it uses the 50% level and 50 isn't even a Fib number.
What it's really doing is looking hard at the 50% retracement level of a strong trend leg. A perfectly reasonable place to look for a pullback to end. The strategy is just using the Fib tool to mark it on the chart.
The next important point being the signs used for a signal. The first sign is the price drop being halted at that particular level (50% retracement). That can only mean that traders who are capable of moving the market had placed orders precisely at that point. They got their Fib tool out and placed speculative limit orders on the 50% retracement level.
In some cases that will work, there will be enough buying to halt the price drop at 50%. If you are a big enough trader to move the market and you have just helped stop the move down then you will start adding to the long position. If that works the market will turn and that will give the strategy's second sign, the next candle being the opposite colour (entry on this bar close).
So what the strategy is really about is looking for specific signs that big traders are using the 50% retracement level to re-enter the market expecting trend continuation, identifying the point when big traders are entering the market should be the main goal of every retail trader.
Often the 50% won't be used or the traders aren't strong enough to halt the market or not strong enough to reverse it, fine - you don't get a signal so you don't enter. And of course even with all the signs the trade may not work out but I like the principle behind the strategy and I like the idea of not trying to look everywhere on a chart but in one specific place only, and just let all the others go. So you are looking for one thing on many charts rather than many things on one chart.
Would have been more useful if I had included a more detailed example in my first post, I've taken this one from Friday EURUSD 5 min, interesting to note that after the initial interaction at the 50% retracement level during the afternoon the 50 was repeatedly attack and held through the rest of the day into the close.
I don't follow the 5min chart just the daily but I thought I would give it a go on EUR/JPY. After dropping, there was a retrace back to the Fib 50 on 7-11 followed by an opposite candle on 8-11 which I then shorted. So far so good, but it did go against one of the indicators I like to use so I was a bit worried. I wonder if the EUR/JPY will go down as far as 1.5 times as the strategy suggested because that is quite a drop.
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