I use Fibonacci tools for trading, not because I believe in black magic or the omnipresence of the golden ratio, but because they are an efficient tool to establish support and resistance. I am posting here, because I further want to explore the best use of these tools. Basically I watch out for
- prior swing highs and lows
- retracements
- expansions (retracements that exceed 100%)
- measured moves (equal size or harmonic ratio for several legs of a trend or correction)
- projections (multiple up and down projection of prior ranges)
:nerd:More details can be found in the books by
Carolyn Boroden: Fibonacci Trading
Constance Brown: Fibonacci Analysis
Joe DiNapoli: Trading with DiNapoli Levels
Robert C. Miner: High Probability Trading Strategies (my preferred book)
Larry Pesavento: Trade What You See
(1) First approach to Fibonacci levels: My first try was an indicator which is available in the download section and below. It is not elegant in its approach, but it does its job and identifies all major highs, lows, retracements and expansions. One of the main ideas is also to identify major support and resistance lines. To do this you need to go back in time to understand where are the levels where large institutional traders and funds will participate.
(2) For the second approach I used a collection of 10 zigzags in different timeframes and then calculated the lines as under (1), but adding measured moves and projections. This adds up to over 500 lines on your charts, and this would confuse any trader and exhaust the memory of your machine. So I ran some probability distributions to find out how the lines impact prices and defined confluence zones via a window that moves vertically through the lines and collects the relative weight of these. The indicator displays the "strongest" line within the confluence range. Lookback period and minimum deviation of the zigzags can be adjusted. Otherwise the indicator autoadjusts to volatility as measured over the lookback period of the chart.
Higher probability lines are expansions, followed by prior swing highs and lows and the common retracements. Measured moves and projections are less important, but if these occur on a higher timeframe, they may easily beat the expansions or retracements.
Below are a couple of charts for ES and 6E showing the detail of the lines and the confluence zones.
I am looking for someone interested in evaluating these tools and sharing information on trading approaches using these. If somebody is interested in testing the fib confluence indicator, please send me a private message. I am not planning to give this away for free, simply because it was too much work. Does anybody use the NEXGEN indicator?
:phone:This is what I would like to discuss:
- Data used for futures (backadjusted or not, which backadjustment)
- Entries (pullback)
- Exits (third wave exits, trading ranges)
- Risk/reward ratios for entries