A Pocket Guide to Fibonacci Trade Setups

 | Jan 15, 2014 | 11:00 AM EST
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As longtime readers will know, my work uses a very simple formula to make money:

Trade setup + trigger = entry

(Then, manage the trade.)

With that in mind, let's walk through a setup in the PowerShares QQQ (QQQ) that is still in play. This can help you understand how to use my setups in the future.

In Monday's session, I saw a classic setup -- a two-step pattern cluster -- developing in the Qs as the market took a fairly unexpected dive for the day. This is essentially a zig-zag pattern that includes the coincidence of at least three key Fibonacci price relationships within a relatively tight price range.

QQQ -- Daily I
Source: Dynamic Trader

Now, on the daily chart, we actually saw the coincidence of more than just three price relationships, and the first cluster came in at the $85.48-to-$85.68 area. Not only did the fund test and hold above that price support, but a cluster of Fibonacci time cycles were also due between Monday and Wednesday.

So, for the Qs, the setup was in place with our requisite time and price parameters -- and then, with Tuesday's gap open, we also saw a buy trigger fire off on a 15-minute chart. The entry wouldn't have been very graceful, but that trigger nonetheless constituted a buy signal in QQQ. Our initial risk for the trade was defined below $85.86 -- the low that the fund hit prior to the buy signal.

If we see the full move off this trade-setup zone, the first target will come in at $88.58, and the second at $89.37. Since the QQQ has not yet met the upside target at this point, I will now set up pullbacks for another buy entry, as well.

QQQ -- Daily II
Source: Dynamic Trader

Now, on this second chart, I've illustrated exactly where the price relationships came in and collided. We saw a confluence of a 0.618 retracement that overlapped two 100% projections of prior declines, along with a 1.272 extension.

You just can't make this stuff up. If you wish, you can actually go back and recalculate this price cluster for yourself (with the highs and lows I've marked on the chart), and I think you will start to understand the method behind my madness.

As always, remember that stocks don't always make the upside target, so be sure to use a trailing stop with any of my trade setups.

For more information on trade triggers, please refer here

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