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Presentation on theme: "IBD MEETUP/NORTHRIDGE"— Presentation transcript:


2 DISCLAIMER During the course of this meeting we will review stocks that should be considered as additions to your watch list. These are not trade recommendations. These are candidate trades.   Do your own research, keep position sizes modest, and stay diversified.  Also past performance is no indication of future stock trends. We will also discuss Trading Strategies we believe to be effective; however keep in mind that nothing works100% of the time sothere is no guarantee these strategies will work for you.

3 AGENDA Online trading Trading Plan Market Structures Trends
Who is Fibonacci? Introduction to Fibonacci numbers Fibonacci Retracements Support and Resistance levels What are support and resistance? Why is it important to watch for S&R levels?

4 ONLINE TRADING Very Complex How do you decipher this?
Dynamic nature of multiple time frame charts Cross referenced by indices and ticks Changing second by second Producing contradictory signals Add a plethora of technical indicators, moving averages, oscillators, pitchforks, patterns, etc. Equals ‘Information Overload.’ Countless lists of ‘Hot Stocks’ all about to break out, or down, or just go sideways. How do you decipher this?

Different time frames for Trends Major Trend Intermediate Trend Minor Trend Multiple Stocks Multiple Indicators Trade Exploration is a constant search. THE QUESTIONS: How do you search? Do you have a system? Are confusing charts confusings you? Do you see ‘red flags’ that stop your trades? Do you know the trends? Do you recognize the start? Can you see the trading range? Can you see the termination? Do you have indicator(s) to give you clear entry, exits and stops?

6 THE OODA LOOP Observe – Gather information about the trends, time frames, etc. Orient - ,What is the current market, chart patterns, indicators, volume flow. Decide - What is the potential trade setup, size, entry, exit, stops. Act – Execute and debrief. Was the trade profitable?

7 TRADING PLAN A trading plan is a written set of rules that defines how and when you will place trades and includes the following components: Trading instruments Time frames Position sizing Entry conditions (including filters and triggers) Exit rules (including profit target, stop loss and money management) 

8 MARKET STRUCTURES The market is made up of basic units, or building blocks, called Market Structures,  Market Structure High and Market Structure Low.  Most price movement in the market can be defined in terms of MSL's and MSH's, and the ranges that are found in- between them.  A Market Structure Low (MSL) is the first sign of a potential reversal in prices from a downtrend to an up trend.  It is usually made up of three price bars (or candles): A low, a lower low, and then a higher low.  The "Low" is measured from the actual low of the candle, not the closing price.  Ideally, as shown in Figure1, the Low and Lower Low will both be "down" bars (where the closing price is lower than the open price), whereas the third bar, the Higher Low, will be an up bar. The opposite of a MSL is a Market Structure High (MSH).   It is the first sign of a potential reversal in prices.  A MSH is usually made up of three price bars (or candles): A high, a higher high, and then a lower high.  The "High" is measured from the actual high of the bar, not the closing price.   MSL MSH

9 REVERSAL PATTERNS The next important building block is made up of MSL's and MSH's.  Just as a MSL is the first sign of a potential reversal in prices, the combination of a MSL, a MSH, then a MSL that is higher than the first one, is a confirmation pattern that a down trend has reversed into an up trend.  This is illustrated in Figure  Note that the MSL trigger on the higher MSL is the first point of entry for a reversal trade, however the reversal is not confirmed until prices move above the high of the previous MSH.  

10 When you’re studying a price chart what is your eye drawn to first?
Is it the indicators?  Is it moving averages?  How about candles? Are you taking a moment to address the context in placing the trade? Is it a counter-trend fade?  A pro-trend retracement?  A breakout from a consolidation pattern (like a rectangle or triangle?)  Foundational principle regarding trend structure is: the most basic aspect of a price chart – price itself. Dow Theory, an Up-Trend is defined as a series of higher swing highs and swing lows, and a Down-Trend is a series of lower swing highs and lower swing lows. Up-Trend, the “Up” swings tend to last longer in both duration (time) and price (percentage moves) when compared to down/retracement swings. Trade in the direction of prevailing trend (of timeframe) PRICES MOVE IN TRENDS

Generally, when buyers outnumber sellers, the price goes up – until the buying pressure is spent.  Then prices usually collapse, or retrace, in the direction from which they came.  Why, because sellers now outnumber the buyers and are chasing the price back down.   In a trending market, this tends to have a rubber band effect; each advance is met by a retracement.  After the sellers have taken their profits, if the overall uptrend is still intact, the retracement will then be met by another advance.    The combination of an advance, a retracement, and another higher advance forms a wave pattern, as shown in Figure . Note how the wave pattern is made up of a MSL, followed by a MSH, followed by a higher MSL. This is the basic building block of any wave: MSL, MSH, Higher MSL.  For a downward wave, the pattern is simply the reverse:  MSH, MSL, and Lower MSH.  


Useful for identifying reversals on a stock chart. Based on numbers developed by Leonardo Fibonacci; Keep adding two previous numbers in a sequence to derive the next number. 0,1,1,2,3,5,8,13,21,34,55…. The relationship between these numbers is what gives us the common Fibonacci Retracement patterns in Technical Analysis. You do not automatically buy the stock just because it is at a common retracement level! Wait, and look for candlestick patterns to develop at the 38.2% area. If you do not see any signs of a reversal, then it may go down to the 50% area. Look for a reversal there. You do not know if or when the stock will reverse at a Fibonacci level! You just mark these areas on a chart and wait for signal to go long or short.

The ratios are based on the distance between Fibonacci numbers. If we use three numbers from a simple Fibonacci series (1,1,2,3,5,8,13,21,34,55…) you can see how this works in the examples below. 1. (34-21)/34 = 38.2% 2. (34-21)/55 = 23.6% 3. (34-21)/21 = 61.8%


16 WHERE DO THE LINES GO? The sticky part of fundamental and technical analysis is that they are both very subjective, which means that they allow for a great deal of interpretation and individual preference. However, with Fibonacci analysis that subjectivity is easy to handle. Typically you want to apply the Fibonacci anchor points to the major highs and lows of the most significant recent trend. In the CHART  you can see how this was applied to the EUR/USD and the subsequent resistance/support bounces that coincided with those levels over the next year.

17 BODIES OR SHADOWS? There is always a minor debate about whether you should anchor your Fibonacci retracement to the body of a candle or the shadows. The shadows includes the extremes of market sentiment. Most of the time, the difference is insignificant but sometimes it can be critical

When fitting Fibonacci retracements to price action, it's always good to keep your reference points consistent. So, if you are referencing the lowest price of a trend through the close of a session or the body of the candle, the best high price should be available within the body of a candle at the top of a trend: candle body to candle body; wick to wick.  Misanalysis and mistakes are created once the reference points are mixed - going from a candle wick to the body of a candle.

Fibonacci can provide reliable trade setups, but not without confirmation. Applying additional technical tools like MACD or stochastic oscillators will support the trade opportunity and increase the likelihood of a good trade. Without these methods to act as confirmation, a trader will be left with little more than hope of a positive outcome. 

Identify a seed wave and use Fibonacci growth ratios to estimate how high the next wave(s) will be.  Note ratios do not tell us there will be a subsequent wave.  They tell us what to do if there is another, higher, wave. See the Figure  (1) This is the start of a seed wave.   (2)End of the first wave, as determined by the MSH.  Subtract the bottom from the top of the wave to get the range.  [55.76 – = 1.21.]  This range is shown on the chart, with (1) as 0% and (2) as 100%.  (3)This is the higher MSL.  It also represents the retracement back down from the initial advance to the MSH.  Typically, if prices are moving upward with strength, the retracement will be to about 50% of the range of the previous wave.  The main candle bodies of the MSH found support at the 50% retracement pivot.  (4)This is the end of the next advance.  Once prices retrace to point (3), and once we see them pivot and move on up, we can then use the Fibonacci targets to estimate where the top of the next wave will be. The calculation is easy.  Take the range of the seed wave, which we already know is Multiply that by the Fibonacci ratio of 1.618 to get  That is the target for the growth of the next wave up.  Prices rose exactly to that target before falling back.   FIBONACCI CAN FORECAST WAVES!

21 1st the Fibonacci tool works best when the market is trending.
Go long (buy) on a retracement at a Fibonacci support level when the market is trending up, and go short (sell) on a retracement at a Fibonacci resistance level when the market is trending down. To find these retracement levels, find the recent significant Swing Highs and Swings Lows. For downtrends, click on the Swing High and drag the cursor to the most recent Swing Low. For uptrends, do the opposite. Click on the Swing Low and drag the cursor to the most recent Swing High. HOW FIB WORKS

22 ABC's Price objectives for a natural retracement (38.2%) can be determined by adding (or subtracting in a downtrend) the magnitude of the previous trend to the 38.2% retracement. After the 38.2% retracement the stock should break through the previous swing point(B) on heavier volume. If the volume isn't there the magnitude of the move will usually be diminished, especially on very low volume. 61.8% retracements are warning signs of a potential trend changes.

23 The Mathematics Mathematicians, scientists and naturalists have known this ratio is derived from the Fibonacci sequence, Each term in this sequence is simply the sum of the two preceding terms (0,1, 1, 2, 3, 5, 8, 13, etc.). But this sequence is not all that important; rather, it is the quotient of the adjacent terms that possesses an amazing proportion, roughly 1.618, or its inverse This proportion is known by many names: the golden ratio, the golden mean, PHI and the divine proportion, among others. So, why is this number so important? Well, almost everything has dimensional properties that adhere to the ratio of 1.618, so it seems to have a fundamental function for the building blocks of nature. GOLDEN RATIO There is a special ratio that can be used to describe the proportions of everything from nature's smallest building blocks, such as atoms, to the most advanced patterns in the universe, such as unimaginably large celestial bodies. Nature relies on this innate proportion to maintain balance, but the financial markets also seem to conform to this 'golden ratio.‘

Fibonacci numbers are commonly used in Technical Analysis with or without a knowledge of Elliot wave analysis to determine potential support, resistance, and price objectives. 38.2% retracements usually imply that the prior trend will continue, 61.8% retracements imply a new trend is establishing itself. A 50% retracement implies indecision. 38.2% retracements are considered neutral retracements in a healthy trend.

25 Draw a Fibonacci grid (fib grid) from the swing point high and the swing point low of a swing, a standard option on most charting packages. Or, calculate it manually as follows: Calculate the range from the swing point high to the swing point low. [ =‘s a range of 5.79.] Now multiply the range times these ratios: 38.2% (2.21), 50% (2.90), and 61.8% (3.58). Subtract the ratio numbers from the swing point high. This equals the Fibonacci levels (29.61, 28.93, ) This chart shows HS pulled back into a trade zone and then formed a  bullish engulfing candle at the 50% level a signal to go long. Nice trade! HOW TO DRAW A FIB GRID

26 These ratios seem to play an important role in the stock market, just as they do in nature, and can be used to determine critical points that cause an asset's price to reverse. The direction of the prior trend is likely to continue once the price of the asset has retraced to one of the ratios. The following chart illustrates how Fibonacci retracement can be used. Notice price changes direction as it approaches the S/R levels. Stocks will often pull back or retrace a % of the previous move before reversing. These Fibonacci retracements often occur at three levels – 38.2%, 50%, and 61.8%. Fibonacci retracement levels help determine how far one expects a market to retrace before continuing in the direction of the trend. THE ROLE OF FIB RATIOS

When used in technical analysis, Fib. ratio is typically translated into three percentages: – 38.2%, 50% and 61.8%. However, more multiples can be used when needed, such as 23.6%, 161.8%, 423% and so on. The 4 primary methods for applying the Fib Sequence to finance are: retracements, arcs, fans and time zones. Fibonacci Retracements Fibonacci retracements use horizontal lines to indicate areas of support or resistance. First locate the high and low of the chart. Draw 5 lines: (the high), the 2nd @61.8%, the the & the 5th @0% (the low.) After a significant price movement up or down, the new support and resistance levels are often at or near these lines. Take a look at a chart  which illustrates retracements: THE FIBONACCI STUDIES AND FINANCE

28 CONFLUENCE  Confluence occurs when you take Fibonacci projections off of multiple trends and get the same number and strengthens when it corresponds with other technical advents such as gaps, swing high/lows, chart indicators crossovers (MACD, RSI, Stochastics, etc.), trading congestion, etc. The more confluence, the more significant the level. Really take notice when you get two or more fib #s (say a 38.2% and 61.8%) to correspond with a gap in the chart or a swing high. Confluence is very powerful as it combines multiple technical analysis techniques to arrive at the same conclusion, and should be relied on accordingly.

Support and Resistance is more often an area around the Fibonacci lines than a specific to-the-penny point in the charts. You will find that prices move around a support or resistance line, especially during a consolidation. Discounting that level because of a temporary break may lead you to ignore a valid signal in the future. As with most analytical tools, there are many great ways to accomplish the same task. Analysis will vary due to individual risk tolerance, personal preference and experience. There is no satisfactory substitute for your own experience. Take the concepts and practice using and adjusting them in the live market.

Now, the expectation was that if AUD/USD retraced from the recent high, it would find support at one of the Fibonacci levels because traders would be placing buy orders at these levels as price pulls back. Price pulled back right through the 23.6% level and continued to shoot down over the next couple of weeks. It even tested the 38.2% level but was unable to close below it. Later on, around July 14, the market resumed its upward move and eventually broke through the swing high. Clearly, buying at the 38.2% Fibonacci level would have been a profitable long term trade!

31 Fibonacci retracements are very productive for timing entries in the direction of the trend.
Define the trend simply as the price area that you applied the Fibonacci retracement. Let’s look more closely at an example in the chart  of the rally from January to June on the GBP/JPY. We have a clear trend in that time frame, so its time to start looking for potential support levels. The retracement study has drawn four horizontal lines that correspond with each of a major Fibonacci levels. Each of these lines is a potential candidate for support and an entry position for a long trade. But which one should we pay attention to? The answer is: we wait. The Fibonacci level does not become important until price reacts to it. Once that happens, we can take some action. TIMING ENTRIES GBP/JPY

32 In the chart  prices bounced neatly off the 38
In the chart  prices bounced neatly off the 38.2% and 50% retracement levels a few times. Each may have been great reentry opportunities for a long position. IS IT REALLY A BOUNCE? Set an entry order at the mid point between the Fibonacci level acting as support and the next Fibonacci level above it. You can see this detailed in the chart  using the October bounce up from the 50% level. This can be adjusted depending on your own tolerance for risk but is a pretty good rule of thumb. THE INITIAL PROFIT TARGET: Target the top of the next Fibonacci retracement level and beyond that the 0% line. If prices break this level, you will need to reevaluate where you think the market will go. However, as an initial profit target the next Fibonacci level and the 0% line or top of the retracement is where to set the two initial targets. THE BOUNCE GBP/JPY

33 Risk control is extremely variable, and depends on personal risk tolerance.
Placing a stop a 3rd between two lower fib levels is a reasonable rule of thumb. See the chart . Most traders use stop losses to control risk. But more experienced traders could consider a call option in this same scenario. A call option limits the risk, but leaves the trade open thereby avoiding “whipsaws.” A whipsaw occurs when the breakout is preceded first by a quick down move below your stop level. RISK CONTROL GBP/JPY

34 TRADING STRATEGIES  Once a new swing point is established in an equity, a new set of Fibonacci numbers should be calculated, and confluence checked to determine potential support/resistance levels and trading strategies. With any strategy it is critical for the volume to be heavier on the swing point breakout. If a position is going with you and you're looking for an exit point, calculate the 38.2% fib once a top is clear and put a stop below it. Won't get you out at the top but you may not miss that monster rally either. Think a stock is a dog but it's trading at it's high wait for a 61.8% retracement from the last trend and sell it, with the stop below the 50% retracement.

35 FIBONACCI ARCS 2. FIBONACCI ARCS Finding the high and low of a chart is the first step to composing Fibonacci arcs. Then, with a compass-like movement, three curved lines are drawn at 38.2%, 50% and 61.8%, from the desired point. These lines anticipate the S/R levels, and areas of ranging. Take a look at the chart , which illustrates how these arcs do this: Fibonacci arcs are considered to be potential S/R levels. Fibonacci Arcs and Fibonacci Fans are usually plotted together on the chart, and S/R levels are determined by the points of intersection of these lines.

36 3. FIBONACCI FANS Fibonacci fans are composed of diagonal lines.
After the high and low of the chart is located, an invisible vertical line is drawn though the rightmost point. This invisible line is then divided into 38.2%, 50% and 61.8%, and lines are drawn from the leftmost point through each of these points. These lines indicate areas of S/R. Take a look at the chart : These lines are considered to represent S/R levels. For getting a more precise forecast, use other Fibonacci instruments along with the Fan. FIBONACCI FANS


38 4. FIBONACCI TIME ZONES Time zones are a series of vertical lines
4. FIBONACCI TIME ZONES Time zones are a series of vertical lines. They are composed by dividing a chart into segments with vertical lines spaced apart in increments that conform to the Fibonacci sequence (1, 1, 2, 3, 5, 8, 13, etc.). These lines indicate areas in which major price movement can be expected. To build this instrument, it is necessary to specify two points to determine the length of a unit interval. All other lines are built on base of this unit interval according to Fibonacci Numbers. The advantage provided by the time projection is it lets you know, in advance, when you should be paying the most attention to a potential support bounce. Expanding your chart to the right will show you the future time study levels so you can make sure you are paying attention on those dates specifically. FIBONACCI TIME ZONES

In the chart  is a time projection anchored to the major bottom of the trend in the USD/JPY. Usually, you should ignore the first five very closely clustered vertical lines as noise so you will start paying attention to the wider spaced 6, 7, 8 and 9 lines. There are lines beyond that, but they begin trending out so far into the future that you will probably have updated your analysis by then. The time study identified some likely volatility “nodes” where reversals may have been expected. In this case, the study proved accurate in the timing of three reversals. Combining the time projection with a retracement can help clarify the signals and make them more reliable; a Fibonacci retracement anchored to the prior downward trend. RETRACEMENT COMBINED WITH TIME PROJECTION USD/JPY


41 CONCLUSION These Fibonacci studies are not intended to provide the primary indications for timing the entry and exit of a stock; however, they are useful for estimating areas of support and resistance. Many people use combinations of Fibonacci studies to obtain a more accurate forecast. For example, a trader may observe the intersecting points in a combination of the Fibonacci arcs and resistances. Many more use the Fibonacci studies in conjunction with other forms of technical analysis. For example, the Fibonacci studies are often used with Elliott Waves to predict the extent of the retracements after different waves. Hopefully you can find your own niche use for the Fibonacci studies, and add it to your set of investment tools!


43 FINAL MEETUP FOR 2014 I hope 2014 will finish a great year for you, your families and loved ones; as well as for your investments. Did any of you go last Saturday to either attend the Level One class or to hear Amy Smith? There is a Level Two Class in December 13th at the Renaissance Hotel, LAX. Our next meeting will be scheduled for the 2nd or 3rd Saturday of January depending on the availability of Fire Station Unfortunately they only allow bookings 30 days in advance. HAPPY HOLIDAYS!!!


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