Fib Retracement Trading...

[daedalus]

I've had a number of requests about how to utilize fib retracements in the markets. So, rather than ***** out another thread with off topic chatter, I thought I'd just start a thread that we can discuss setups and different plays in.

If you want the gist of how to utilize and draw fibs, check out this video. It is not mine, I didn't make it, but I think it illustrates the basics of the method fairly well.

I focus 99% on 61.8% retracements in the markets WITH THE TREND, IN A TREND, on the 60 and 240 minute charts. I also play a shorter 233 tick (allmost like a 10 min chart) for pure daytrade entries.

So as not to violate link rules on this forum, if you are interested in the video i've been speaking of simply pull up Google Video and type in "Fibonacci forex" and search. The video should be the first result. I recommend viewing it on the google result type for better video clarity.

I've got some running around to do today, but i'll try and post up some chart examples later today.

Cheers!

Basic outline of this thread so far:
Lesson of the Day: Basic Setups
Lesson of the Day: Ticks Vs. Time Charts
Lesson of the Day: Some Example Trades
Lesson of the Day: Trade Examples
Lesson of the Day: Respecting Da Grids
Lesson of the Day: Advanced Tactics
Lesson of the Day: Trade Management Pt. 1
Lesson of the Day: Trade Management Pt. 2
Lesson of the Day: Trading Journals
Lesson of the Day: Scaling out of Trades = The BAD
Lesson of the Day: The Take Profit Revelation
Lesson of the Day: Adding Size
Lesson of the Day: Stop Loss Revision
Lesson of the Day: Secondary Indicator Confirmation
Lesson of the Day: Shallow Pullbacks, the other 50% of Forex Action

[Emils]

Thanks for sharing, I watched the video couple times and got the basic idea about Fibonacci trading. I also read the 3rd grade of the school of pipsology again where I came across the following statement:

"Alone, Fibonacci levels will not make you rich. However, Fibonacci levels are definitely useful as part of an effective trading method that includes other analysis and techniques. You see, the key to an effective trading system is to integrate a few indicators (not too many) that are applied in a way that is not obvious to most observers.

All successful traders know it’s how you use and integrate the indicators (including Fibonacci) that makes the difference. The lesson learned here is that Fibonacci Levels can be a useful tool, but never enter or exit a trade based on Fibonacci Levels alone."

Do you use any other signals or indicators to confirm your trades?

[daedalus]

I don't agree with babypips on that one point. I think grids play the most significant role in price action out of any indicator or methodology i've seen. But then again, I am slightly biased. That being said, I do use a couple VERY simple indicators only to indicate trend bias.

*EDIT UPDATE 1/13/07*
I have revised my MA's for trend bias... the above work, but these tend to hold the trend a bit better for my type of trading. Only indicators on the charts are:

62 EMA
78 EMA

Same principals still apply, just make sure your trading with the trend of the MA's which means the fast ma is above/below slow ma to establish trend either up or down.

The chart examples below were created when I was using different MA's. Since then I have revised the system slightly to be more efficient using the above EMA's.


The 62 and 78 are there to establish the overall trend, up, down, or sideways.

Thats it... nothing more. That being said, here is the most important point of all. These pullbacks work extremely well when the markets are trending. Sideways and consolidation points in the charts are not the best place to enter a position be it off a grid, or any other indicator. This means that the first thing we look for is either higher highs or lower lows with our MA/RSI bias.

Until I have a chart pattern like that there is no point in playing. Far too often traders of any methodology are constantly looking for the best place to be in at all the time, 24/7 with no mindfulness of the chart pattern they are trying to trade within. Consolidation chop is consolidation chop, and until movement occurs I don't have anything to do. This is the biggest point that I cannot stress enough.

Also, keep in mind you need to keep track of your risk:reward ratio to have good success here. I put my stops 1 pip outside of the 85% level. If there is too much risk between where I can get in at the 61.8 level and the 85 level, i stand aside. You have to think of EVERYTHING in terms of risk a reward. If you don't you're a dead duck before you get off the pond.

I've added a couple examples here... Hopefully they are fairly self explanatory. I'll add more later on... There is sooo much I want to discuss, i'll add more as thoughts hit me.

I wait for the pullback to come back and TEST the level... if it doesn't touch, it doesn't count. Entry is after close of the candle that interacted with the grid, entry at open of the next candle.

I also will play 38% pullbacks, but i'll go into the specifics of them later... I don't use them nearly as often, and you need to set different stop losses, and I also require the grids to come into contact with price action 2x's and hold before entering the position.

[daedalus]

Tick Chart Differences/Benefits:

A tick chart is a chart that builds candles on a set amount of "ticks" rather than a time chart that builds candles based off a set amount of time. A tick is an order that goes into the market. So a 233 tick chart opens and closes a candle every 233 orders.

The good:
- Added clarity in swings.
- MA Values/Biases are influenced by actual volatility, rather than some period of time.

The bad:
- Not all chart providers (most free at least) don't provide them.
- Can't predict close b/c its based off market volatility rather than, "oh that candle closes at 10:50, i'll be at the screens for it."

The first attachment should illustrate the difference between how a 10minute and a 233tick will vary. Notice how clean the swings are on the tick chart, and note how the same swing on the time chart is drawn out and distorted. Clarity in grid trading just makes life easier. Tick chart is on the right, time chart on the left.

The second attachment should just illustrate again the clarity if I were considering buying this swing, look at the chopped clutter that could fake you out on the time chart. The tick chart on the other hand doesn't display that shakeout. Again, tick chart is on the right, time chart on the left.

Obviously, you can use either or. Price action remains the same. It is just my personal preference to favor the tick charts for the above reasons. Forex has a lot of consolidative chop, and the tick charts do wonders to clear up the mess time charts can make. Over the same period of slop, a time chart might print 10 candles, because 100 minutes has passed. In contrast the tick chart will have printed two candles, telling you that nothing has happened. It keeps you out of crap more often than not.

Its my trading methodology that its more important to stay out of the losing trades, rather than get in the winning trades. More should be added as I think of things to add, or if you guys have questions.

Third Attachment: One trade that i'm holding in as we speak, long the EURUSD. Explanation of setup and entry on the image.

My attachments apparently were too big and have been scaled down to fit... i think the first two you can still tell the difference. I re-uploaded the last so you could make out the trade setup.

Cheers!

[BlackPips]

i like the way you draw your fib. but, isn't it better to just join a trend and move on, i mean, in a trending market. does your fib method involve a kind of scalping where you enter in the retracement and scram at the end of the correction?
is fib the only trigger you use in entring the market? no s/r lines etc?
do you keep and eye on the news/fundamentals?

actually, i made 20 pips last night from fib...it just coincided with an s/r line i had drawn....really cool.
thanks for the insight, i really am getting something here.

[daedalus]

Originally Posted by BlackPips

i like the way you draw your fib. but, isn't it better to just join a trend and move on, i mean, in a trending market. does your fib method involve a kind of scalping where you enter in the retracement and scram at the end of the correction?
is fib the only trigger you use in entring the market? no s/r lines etc?
do you keep and eye on the news/fundamentals?

actually, i made 20 pips last night from fib...it just coincided with an s/r line i had drawn....really cool.
thanks for the insight, i really am getting something here.

You mean join a trend a just hold the position? You could certainly do that, my trade management is certainly not and end all be all. I just try and reduce risk as soon as its prudent to do so and keep my rewards equal to or greater than what i've risked on each trade. All this will offer is a way to enter the market. The management is up to you.

This can be used to scalp. However, like any other method, the smaller the time frame the higher potential for fakeout moves. Frankly, i've traded a 1min and 3 min chart in the S&P for the past year. I like the freedom and laid back time frame the 60 and 240 provide me. Furthermore, they allow me to remove myself from my management and just let the darn thing work or not without me second guessing myself. But like I said, that is all personal preference.

Yes, I only use fibs. S/R lines are good, but frankly as far as i'm concerned less is more. You could combine this with any method on the face of the earth and when you get congruence between the fib grids and the other method i'm sure it would be a very high % win rate. I'm open to ideas and suggestions, but at this point in time, i'm happy with the results i'm producing.

Now for the lesson of the day.

First Attachment: A continuation of last night really. RESPECTING THE CHART PATTERN. I've illustrated this off the 233t(10min) charts this morning in most markets. This should really get across the point of utilizing the grids in trending markets, and not trying to force things without the trend.

Second Attachment: My Typical trade entry and management. Signal fired off at the yellow arrow. Entry is at open price of red arrow candle. Stop loss put 1 tick above the 85% level. Once the 38% level has been hit on the blue arrow candle I move my stop to the 61.8% level which should be fairly close to entry. Essentially reducing your risk down to nothing. If the move has credence and has already bounced off the 61.8% down to the 38% level it should continue without a retest of the 61.8% level. If it does, it probably isn't going to work in the first place and your out with minimal or no loss.

Now on the pink arrow, price has moved down to the swing low. Moves can and do fail to produce new lows, and if they fail they fail at that level. Its typically again where I like to lock in profits by moving my stop down to the 38% level. I'm still shooting for my extension or 2:1 reward targets, but i've locked in profit should i be on the last swing of a trend and it comes back in my face.

The blue and cyan colored arrows are profit target levels defined by the swing. Depending on if and how you've scaled into the position you could cut contracts loose at each level. Your final exit would be a at the 161.8 extension and will be well in excess of 2:1 on the trade.

[daedalus]

Heres a quick setup on a trade I took today off the 60 minute chart.

As you can see the MA's and RSI are clearly bearish, the market is making new lows from the last swing, a nice clean pullback, adherence to that level. I entered at the open of the next candle, managed like normal... and whadaya know... it went straight to the 138% extension. As you can see the management technique of removing risk as the different price levels are hit worked perfectly. Stop was moved once 38% was hit, again once the swing low was hit, and my profit target was achieved at 138% and 161.8%. I maintained a rough 2:1 risk/reward on my position.

Entry: 1.6441
Initial Stop: 1.6467 (26 Pips of risk)
Target 1: 1.6407 (34 Pips of profit)
Target 2: 1.6396 (45 Pips of profit)

Easy-peasy-japanesey!

Keep in mind folks, for most traders the hardest part of trading is DOING NOTHING. Sitting on your hands is the easiest way to stay profitable. Wait for the clean setups where you've got everything going for you. No indicator developed under the sun can improve your trade win percentage and overall profit loss like that advice. Trade - Don't Gamble out of boredom!

Cheers folks!

[Emils]

Thanks daedalus I will try trading Fib levels om my demo account. As I don't use Tradestation I don't have the JTHull MA. I hope it is not very important. Maybe there is something I should use instead of it?

[daedalus]

The JTHMA isn't that big of a deal, but there really isn't anything that is calculated remotely close to it. If you just left it out you would be fine. The key idea is that all of the ma's lines are set up appropriately to increase the odds of trading with the trend.

[daedalus]

I know this isn't a very popular method because most FX traders are looking for a systematic do A, B, C, and you make pips approach with indicators, but for those still interested in something that isn't subject to the problems those indicators bring up (fake outs, bad signals, entering after the move has taken) here are some more setups and information.

First and foremost, i've done some backtesting further with PSAR and some other indicators and MA setups to see if there was a better, more profitable way to establish trend bias but I came back to what i've been using. Whatever you gained on one setup was lost on the next, so the indicators remain the same. I've even pulled the JTHMA's off my 60 and 240 min charts as they were doing more harm than good. It is VERY important to realize that the grids have superiority over any ma value out there. If price respects the grid, you had best do the same regardless of trend.

The following uploads are the daytrade setups from Friday. You'll note that most of the plays were off the news reaction swing in the morning with Non Farm Payroll as it was announced in the U.S. Markets. I just played the pullbacks that signaled as necessary. They all worked out for at least 1:1 assuming you entered at the open price where the arrow is and set your stop 1 pip above 85%. Please note that on the AUDCAD setup I did not draw the grid from the swing high proper, but from the swing high of the news announcement. I have found that many times the markets respect the grids of major news announcements primarily than any other swing. If you had draw it proper it wouldn't have hit an exact 62% retrace. If thats the case and you want to keep things simple, oh well, no signal, no profit, no big deal. Move on to the next.

Also note that all the trades were just with the trend 100%. The GBPUSD trade was a bit more "sketchy" and because it had been sitting on top of the 89 EMA I took profit at the 89 EMA expecting that it could bounce from there. That is just the discretionary aspect of trade management. I decided to play it better safe than sorry in that instance.

Next up... Current swing setups and some more on grid measuring.