Fibonacci Lines – The Basics Fibonacci price projections are unique ratios that can predict important future price levels based on past price action. Some of the ratios used are .236, .382, .50, .618, .786, 1.0, 1.382, 1.618, 2.0 and 2.618. We use “Price Swings” on a chart as “Pivots.” By multiplying the price difference between the pivots by a “Fib Ratio,” we can calculate the significant price levels above and below where the market is currently trading. When constructing these fib lines (prices) from different sets of pivots from the same chart, often there is a price or price zone where 2 or more fib lines cluster tightly together in CONFLUENCE. These areas of confluence are even more powerful as we continually “map out” the significant fib levels. By constructing these fib levels on multiple time frames (ex. 5-minute, 15-minute, 58-minute charts), we further enhance the effectiveness of the fib level confluences that we identify. While some of the fib work is based on RETRACEMENTS between swing highs and swing lows (pivots), we focus more on projecting EXTENSIONS and EXPANSIONS. These tend to mark an “Exhaustion” price or zone where the market will have expended/exhausted its directional move. We use these significant fib levels to guide our trading. Using them as a trade entry, we typically will trade a REACTION off a significant fib price level as long as we include other Confirming Factors. But the fib levels may also function as CFs to bolster another primary trade entry signal. Fib prices can help hone our exit from a trade that we are currently holding. Since the market tends to react off these prices as support and resistance, if we are still in a long trade, we may wish to exit as we near a significant fib line that was above the market. Also, fib levels show Role Reversal. If resistance is penetrated it becomes support and vice versa. There are 4 primary types of Fibonacci Projections that we use: 1. 2. 3. 4.
Extensions Alternates Expansions Retracements
The following diagrams show an example of each, describing how it is calculated. These examples have the SWING LOW (Pivot #1) followed by the SWING HIGH (Pivot #2). The diagrams would simply be inverted to show and calculate a SWING HIGH (Pivot #1) followed by a SWING LOW (Pivot #2). Again, these are simply “the basics” for understanding fibs so that we can better construct key fib techniques.
1. EXTENSIONS
Extensions take the range from Pivot #1 to Pivot #2 and multiply that amount by a fib number. The resulting value is then added to the range of Pivot #1 and Pivot #2 to project an “extension” price from Pivot #1. 2. ALTERNATES
Alternates take the range from Pivot #1 to Pivot #2 and multiply that amount by a fib number. The resulting value is then added to the price of Pivot #3 to project an “alternate.
3. EXPANSIONS
Expansions take the range from Pivot #3 to Pivot #2 and multiply that amount by a fib number. The resulting value is then added to the price of Pivot #3 to project an “expansion.� 4. RETRACEMENTS
Retracements take the range from Pivot #1 to Pivot #2 and multiply that amount by a fib number less than 1.0. The resulting value is then subtracted from Pivot
#2 to generate a “retracement” price level where the next swing down (Pivot #3) should halt and reverse.
Dual Fibs (DFs) and Displaced Alternates (DAlts) (Exhaustion Zones on the Chart) Fibonacci patterns are the Primary tool we use to define Exhaustion Zones on the bar charts, with support below and resistance above the current market’s price action. Exhaustion Zones are good for helping us initiate trades using other exhaustion indicators, helping us choose profit targets and to determine trade size and rank trades based on potential upcoming support/resistance (exhaustion zones). Fib patterns represent in context that the market will make progressive moves in the same direction with symmetrical waves (both in price and time). We focus mainly on PRICE, but TIME is important to increase the odds of success (80%+), especially in the longerterm projections. Wave symmetry will form in two dominant ways: 1. A 1:1 symmetry (a measured move). 2. A symmetry that will be Fib ratio related (ex. 1:1.382). DF and DAlt patterns are different in that they are derived from different locations on the chart. A DF pattern comes from the same sequential wave, whereas a DAlt comes from a different wave (earlier than the current wave a DF uses). DF patterns require three pivots: a #1 low pivot, a #2 high pivot and a #3 pivot that is between the low and the high of pivots #1 and #2 (the basic 1-2-3 setup). If you are in a trending market and cannot find a #3 pivot between pivot #1 and #2, use a DAlt to take a prior measured move and apply it to the current price action. The DF will be covered first, then the DAlt.
DFs - DUAL FIBS When calculating DF levels we look at ALL timeframes, but my primary is the daily chart. We use two primary Fib retracement levels in calculating DFs: the .236 and .382. Below is a detailed description of the process: Bullish Upside Targets/Resistance: For finding resistance above the market, the bottom of the Fib tool is referred to as “The Anchor” or “Lower Extreme” while the top of the Fib tool is the “Upper Extreme.” The .236 is the First Internal Fib, and the .382 is the Second Internal Fib. Step#1 - Find a 1-2-3 setup 1. Find a 2 ringed pivot low (pivot #1) and draw a horizontal line across the low of the pivot. 2. Find the next 2 ringed pivot high (pivot #2) and draw a horizontal line across the high of the pivot.
3. Then find the next 2 ringed pivot low (pivot #3) that is the Lowest LOW between pivot #1 and pivot #2, and draw a horizontal line across the low of the pivot. Step#2 Anchor the Fib tool to the pivot#1 low line and drag the tool up until the First Internal Fib (.236) lines up with the pivot#2 high line. Step#3 Draw a horizontal line across the Upper Extreme of the Fib tool and change its color to Cyan. Step#4 Displace the Fib tool from the Anchor/Lower Extreme (pivot #1 low) so that the Lower Extreme lines up with the pivot #3 low line. Step#5 Draw a Horizontal line across the First Internal Fib and change its color to Red. Draw a horizontal line across the Upper Extreme and change its color to Magenta. Step#6 Remove the Fib tool. Step#7 Anchor a new Fib tool at the pivot#1 low line and drag the tool until the Second Internal Fib (.382) lines up with the #2 pivot high line. Step#8 Draw a horizontal line across the Upper Extreme of the Fib tool and change its color to Yellow. Step#9 Remove the Fib tool and original lines drawn to mark the three pivot highs/lows. There should be only 4 lines left: Cyan, Red, Yellow, and Magenta. The four lines are actually two pairs of lines. The Cyan and Red lines represent the DF1, with the Red line being the Dominant line. The Yellow and Magenta lines represent the DF1X (exhaustion) with the Magenta line being the Dominant line. The Cyan Line is a 1.382 Extension. The Red line is a 1:1 Alternate The Yellow line is a 1.618 Extension The Magenta line is a 1.382 Alternate
When using DFs for day trading the following is important: 1. The Closer the Yellow line is to the Red line (than the Cyan is to the Red line), the stronger the DF pattern (this is an enhancer, not a requirement) 2. Also, if 2 lines are VERY close or even OVERLAPPING = even stronger level.
Step#10- Parallel Trend Channel Test This test looks for Price and Time to intersect in a symmetrical fashion. DF1s are more powerful if BOTH price and time symmetry are present. 1. Draw a trend line from the #1 pivot low to the #3 pivot low. 2. Make a New Parallel trend line and drag it to the high of pivot #2 (keeping the trend line Parallel) 3. Make sure both trend lines Extend Right. 4. We want the market to intersect the Red Line (DF1) and the Upper Parallel Trend Line in the SAME Bar… this indicates symmetry in BOTH price and time.
CHART EXAMPLES OF THE DF DRAWING PROCESS Now that we have the rules and steps for creating the 4 DF1 and DF1X lines on a chart, we will walk through the same steps one-by-one with actual chart examples for better understanding how to construct them. We will be using a Bullish Upside Target/Resistance scenario as the example. Note: in these chart examples, horizontal lines will not be drawn through each of the 3 pivots. Instead, the Fib drawing tool simply uses the pivots themselves to prevent “chart clutter.” Step#1 - Find a 1-2-3 setup 1. Find a 2RP low (pivot #1). 2. Find the next 2RP high (pivot #2). 3. Find the next 2RP low (pivot #3) that is the Lowest LOW between pivot #1 and pivot #2.
Step#2 Anchor the Fib tool to the pivot#1 low and drag the tool up until the First Internal Fib (.2764) lines up with the pivot#2 high.
Step#3 Draw a horizontal line across the Upper Extreme of the Fib tool and make its color Cyan.
Step#4 Displace the Fib tool from the Anchor/Lower Extreme (pivot #1 low) so that the Lower Extreme lines up with the pivot #3 low.
Step#5 Draw a Horizontal line across the First Internal Fib and make its color Red. Draw a horizontal line across the Upper Extreme and make its color Magenta (on the next chart).
Step#6 Remove the Fib tool. Step#7 Anchor a new Fib tool at the pivot#1 low and drag the tool until the Second Internal Fib (.382) lines up with the #2 pivot high. Step#8 Draw a horizontal line across the Upper Extreme of the Fib tool and make its color Yellow.
Step#9 Remove the Fib tool.
There should be only 4 lines left: Cyan, Red, Yellow, and Magenta. The four lines are actually two pairs of lines. The Cyan and Red lines represent the DF1, with the Red line being the Dominant line. The Yellow and Magenta lines represent the DF1X (exhaustion) with the Magenta line being the Dominant line. The Cyan Line is a 1.382 Extension. The Red line is a 1:1 Alternate The Yellow line is a 1.618 Extension The Magenta line is a 1.382 Alternate When using DFs on the 5-minute chart for S&P day trading the following is important: 1. The Cyan and Red lines must be within a 2 point range to be considered an acceptable DF1, and 2. The Closer the Yellow line is to the Red line (than the Cyan is to the Red line), the stronger the DF pattern (this is an enhancer, not a requirement) Step#10- Parallel Trend Channel Test This test looks for PRICE AND TIME to intersect in a symmetrical fashion. DF1s are more powerful if BOTH price and time symmetry are present. 1. Draw a trend line from the #1 pivot low through the #3 pivot low.
2. Make a New Parallel trend line and drag it to the high of pivot #2 (keeping the trend line Parallel) 3. Make sure both trend lines Extend Right.
4. We want the market to intersect the Red Line (DF1) and the Upper Parallel Trend Line in the SAME 5 minute price bar… this indicates symmetry in BOTH price and time.
5. After the Lower Parallel Trend Line through pivot #3 is drawn, price may subsequently intersect the trend line (but without dipping below the pivot #3 low). In this case an alternate trend line may be drawn from pivot #1 up through the low of the additional price bar(s) to “contain” price within the channel. Then another parallel line can be created that is then moved to the top of pivot #2, creating an alternate Parallel Trend Channel.
Bearish Downside Targets/Support: This is the same step-by-step process used to generate “Bullish Upside Targets/Support,” but it is simply inverted. For finding support below the market, the top of the Fib tool is the “Anchor”; the bottom of the Fib tool is the “Lower Extreme”. The .2764 is the First Internal Fib, and the .382 is the Second Internal Fib. Step#1 - Find a 1-2-3 set up 1. Find a 2RP high (pivot #1) and draw a horizontal line across the high of the pivot. 2. Find the next 2RP low (pivot #2) and draw a horizontal line across the low of the pivot. 3. Then find the next 2RP high (pivot #3) that is the Highest HIGH between pivot #1 and pivot #2, and draw a horizontal line across the high of the pivot. Step#2 Anchor the Fib tool to the pivot#1 high line and drag the tool down until the First Internal Fib (.2764) lines up with the pivot#2 low line.
Step#3 Draw a horizontal line across the Lower Extreme of the Fib tool and change its color to Cyan. Step#4 Displace the Fib tool from the Anchor/Upper Extreme (pivot #1 low) so that the Upper Extreme lines up with the pivot #3 high line. Step#5 Draw a Horizontal line across the First Internal Fib and change its color to Red. Draw a horizontal line across the Lower Extreme and change its color to Magenta. Step#6 Remove the Fib tool. Step#7 Anchor a new Fib tool at the pivot#1 high line and drag the tool until the Second Internal Fib (.382) lines up with the #2 pivot low line. Step#8 Draw a horizontal line across the Lower Extreme of the Fib tool and change its color to Yellow. Step#9 Remove the Fib tool and original lines drawn to mark the three pivot highs/lows. There should be 4 lines left: Cyan, Red, Yellow, and Magenta. The four lines are actually two pairs of lines. The Cyan and Red lines represent the DF1, with the Red line being the Dominant line. The Yellow and Magenta lines represent the DF1X (exhaustion) with the Magenta line being the Dominant line. Step#10- Parallel Trend Channel TestRefer to “Step#10” in the prior “bullish example” and simply draw the INVERSE on the chart to include both PRICE and TIME when projecting these zones of support.
ADDITIONAL INFO ON DFs
We do not favor DF patterns where Pivot #3 EXCEEDS the .707Retracement of Pivot #1 to Pivot #2.
The Best DF patterns are when Pivot #3 occurs BETWEEN the .382RTC and .618RTC of Pivot #1 and Pivot #2.
The DF pattern remains intact s long as Pivot #3 is not taken out by price action.
The closer that the Red and Yellow lines are in a DF pattern, the stronger the DF.
We should always be scouting out Higher Level (15 minute) DF patterns to be aware of the Major Exhaustion Zones. Usually the Trend Channel that contains ALL the price action works the Best… That is the reason why we draw an alternate channel if price is not contained by the initial trend line drawn through Pivots #1 - #3.
The High pivot that precedes Pivot #1 can be used as the source for an alternate parallel trend line.
When a Parallel Trend Line shares 3 common pivots (either above or below the trend line) the parallel has Trend Line Confirmation.
DAlts & DAltXs - DISPLACED ALTERNATES DAlts are used primarily when we cannot build DFs due to a lack of recent 1-2-3 price swing pivots (often in strong/smoothly trending markets). In this case do the following: To find support BELOW the market: • Go back in time to a previous 2RP HIGH (the most recent, the better). • Anchor the Fib tool there and drag the Fib tool’s First Internal Fib line DOWN to the next 2RP low. • Then displace (move) the Fib tool to where the Anchor lines up with the CURRENT 2RP HIGH. • The First Internal Fib is the DAlt, and the Lower Extreme is the DAltX (exhaustion). To find resistance ABOVE the market: • Go back in time to a previous 2RP LOW (the most recent, the better). • Anchor the Fib tool there and drag the Fib tool’s First Internal Fib line UP to the next 2RP high. • Then displace (move) the Fib tool to where the Anchor lines up with the CURRENT 2RP LOW • The First Internal Fib is the DAlt, and the Upper Extreme is the DAltX (exhaustion).
CHART: 1st STEP IN CREATING DAlt & DAltX – 5-MINUTE CHART
CHART: 2ND STEP MOVES FIB TOOL TO CREATE DAlt & DAltX – 5-MINUTE CHART NOTE: In the above chart example, the DAltX is the bottom red line on the Fib Tool (referred to as the “LOWER EXTREME”). If the market had traded down through the DAlt, the DAltX would likely have been the SUPPORTING price level, reversing the market back up. The “X” in DAltX represents the “eXhaustion” potential of the pullback. A DAltX chart example of RESISTANCE is shown below.
CHART: DAltX EXAMPLE TO FIND RESISTANCE – 15-MINUTE CHART
DF4, DF5, DF6 The DF4, 5, & 6 use Extensions and Expansions to project Exhaustion ZONES. Each projection must include either a 2.618 Extension or 2.618 Expansion. Extensions always Anchor at PIVOT #1 and place an Internal Fib on PIVOT #2…the Extreme Fib Line is the Extension (2.0 is a dashed LIGHT GRAY line, 2.168 is a solid LIGHT GRAY line). Expansions always Anchor at PIVOT #3 and place an Internal Fib on PIVOT #2…the Extreme Fib Line is the Expansion (2.0 is a dashed DARK GRAY line, 2.168 is a solid DARK GRAY line). Below is the Translation Table of what an Internal Fib placed on a pivot will produce (either expansion or extension; i.e. Internal Fib Anchored on pivot #1 or pivot #3):
Internal Fib Tool Lines
Translation of Extension/Expansion (Fib Tool “Extreme Line”)
LINE #1 LINE #2 LINE #3 LINE #4
1.382 1.618 2.0 2.618
• • • • • • •
23.60% 38.20% 50.00% 61.80%
These constructions must be part of the same directional “wave form.” The 2.618 Extensions/Expansions are the BEST exhaustion zones. We typically see Extensions MORE FREQUENTLY than Expansions. DF4, DF5, and DF6 patterns are Almost ALWAYS 3 WAVE MOVES. They are usually the Third Wave in the SAME direction AND represent BOTH Structural and Price Exhaustion. The KEY to finding Good DF4, DF5, or DF6 patterns is Finding Symmetrical 3 WAVE MOVES. ALWAYS look for Wave Symmetry in BOTH PRICE and TIME for the strongest patterns. If we see a 2-wave move, we should begin looking for a DF4, 5 or 6
A DF4 is Any 2.618 Extension or Expansion that OVERLAPS with a DF1 or a DF1X (within a 2-point range on a 5-minute chart, 2-3 point range on a 15-minute chart). A DF5 is Any 2.618 Extension or Expansion that OVERLAPS with Any 2.0 Extension or Expansion (within a 2-point range on a 5-minute chart, 2-3 point range on a 15-minute chart). A DF6 is when you have 2 OR MORE 2.618 Extensions or Expansions OVELAPPING each other (within a 2-point range on a 5-minute chart, 2-3 point range on a 15-minute chart).
The following pages show chart examples of the DF4, DF5 and DF6.
A DF4 is Any 2.618 Extension or Expansion that OVERLAPS with a DF1 or a DF1X (within a 2-point range on a 5-minute chart, 2-3 point range on a 15-minute chart).
A DF5 is Any 2.618 Extension or Expansion that OVERLAPS with Any 2.0 Extension or Expansion (within a 2-point range on a 5-minute chart, 2-3 point range on a 15-minute chart).
A DF6 is when you have 2 OR MORE 2.618 Extensions or Expansions OVELAPPING each other (within a 2-point range on a 5-minute chart, 2-3 point range on a 15-minute chart).
TF100 – The Ultimate Fusion of Fib Analysis The TF100 brings together Fib analysis with support/resistance (DPTL type market activity). When looking for TF100s use the 5, 15 and 58-minute charts. The higher the time frame, the stronger the TF100. The BASIC concept for the TF100 is as follows. We first Anchor the Fib tool on a Major pivot (on 5 min chart that would mean a Daily high or low). Then drag the fib tool so the
Internal Fib Lines are lined up with 2RPs in the “Best Possible Fit.” When looking at the internal Fibs (use the .2764, .386, .50, .618, .707, and .786) we want as many of them as possible to line up as DPTLs, or at a minimum as stopping points of price action (forming a two ringed pivot “Direct Hit” on the Internal Fib). If a Minimum of THREE of the Internal Fibs have a two ringed pivot Direct Hit, the “ESTREME” (opposite the Anchor) is the TF100. The entry point is the TF100 price. The profit target is the First Internal Fib (.2764).
The “Variance Test”: How to determine valid “Direct Hits” When looking for Direct Hits of 2RPs on the Internal Fibs, the price will in most cases come short or exceed a fib line. The “Variance” is the amount by which the pivot can either miss or penetrate the Internal Fib and still be counted as a Direct Hit. The bigger the price swing and the time frame being analyzed, the bigger the variance. The Variance is calculated by taking the distance between the first and second Internal Fibs (.236 value - .382 value) and dividing that number by 4. For example, if the .236 value is 1130.50 and the .382 value is 1128.50, then the variance is (1130.50-1128.50) / 4 = .50. The price of the two ringed pivots in this case can come within or exceed an Internal Fib by .50 points and still be considered a “Direct Hit”. It is best to begin keeping a Log of the possible TF100s we are following and track the Direct Hits to determine the strongest setups. If an Internal Fib has a Direct Hit, it is referred to as a CONFIRMED FIB.
Rules for the TF100: • • • • • • • • • • •
It is a visual and “somewhat” discretionary process. We must pick a MAJOR Pivot High or Low to Anchor the Fib tool. As we drag the fib tool across price action, look for DPTLs to line up with the Internal Fibs in a “best fit” manner. Typically, the first Internal Fib will end up on a major pivot. Our primary goal is to visually get a Best Fit situation for the Internal Fibs. We need one Direct Hit on a MINIMUM of Three Internal Fibs to qualify as a TF100. The more Direct Hits on the Internal Fib Lines for a possible TF100, the better. The ideal is to have Direct Hits on ALL SIX Internal Fibs (having all 6 Internal Fibs confirmed). The more Internal Fibs that are ALSO DPTLs, the stronger the TF100. When looking for Direct Hits, we must work to the RIGHT going forward in time from the ANCHOR pivot. We can use only up to 200-250 bars of data when looking for Direct Hits. If you need to look at more data, simply go to a Higher Timeframe.
• • • •
Multiple Direct Hits on Internal Fib #6 (.786) shows Strength in the TF100. We are looking to short at an upper TF100 or buy at a lower TF100. Enter at the TF100 price, with a standard 3 point risk, but a profit target of the First Internal Fib (usually at least a 2 to 1 reward to risk ratio, even on a 5 minute chart) TF100s are Notorious for forming Double Bottoms and Double Tops, as the same TF100 level may be tested again.
When drawing TF100s, the best procedure is to Anchor the Fib tool and drag it across the chart and find a “BEST FIT” scenario finding Direct Hits and DPTLs. Most TF100s (which means not all of them) will have a Structure that allows you to position the 1st Internal Fib on a LOW Pivot if it is a DOWN Wave or a HIGH Pivot if it is an UP Wave.
CHART: TF100 DRAWN AS A “BEST FIT” WITH FIB TOOL – 58-MINUTE CHART
CHART: TF100 PROJECTED LINE STOPS PRICE – 58-MINUTE CHART