I think I started posting some of my work on this site with the cart before the horse. I will attempt to remedy that within this article, as I want to give you the formula for success in using my work.
The formula for success using Fibonacci Price Analysis is:
Trade Setup + Trigger = Trade Entry
A trade entry is followed up with trade management which includes defining your initial stop placement, deciding how you will trail a stop along with defining exit targets.
Trade Setup - Trigger = NO TRADE
When I take a trade against one of my setup zones, I print up the setup chart along with the trigger chart for my records. On these charts I illustrate the setup, define my stop and my target for the trade. I highly recommend keeping records of your trades this way. (only include the above if you think it fits your style)
What is a Setup?
There are three types of setups that I look for in the markets every day. They are Fibonacci price clusters, symmetry setups and two-step pattern setups. The first two setups are more common than the third.
The definition of a Fibonacci price cluster is the coincidence of at least three Fibonacci price relationships that come together within a relatively tight range. These clusters identify a key support or resistance decision. The chart below is a price cluster in Netflix (NFLX) from the $159.21-$163.49 area. A low was made at $163.57 which was followed by a rally of $33.92.
Symmetry is defined as similarity or equality of swings in the same direction. A symmetry setup is where I am comparing swings in the same direction within a trending market. For example, if we are in an uptrend, I will take the prior corrective declines within the uptrend and project 100% of those corrections from the latest high to identify possible support for an entry. More often than not, these symmetry projections will overlap other price relationships, though one single projection by itself is still considered a trade setup in my book (literally).
In the chart of Oracle (ORCL), I simply projected the prior decline of the July 27 high to the August 31 low from the November 4, 2010 high. This identified possible support around the 26.80 area. The actual low was made at $26.81. Note that the first decline was $3.02 and the second one into the November 30, 2010 low was $3.01. That is symmetry. This was followed by a rally of $6.90 off of one simple symmetry projection. Two of our upside targets were met with this setup.
A two-step pattern setup is also a Fibonacci price cluster with the coincidence of at least three Fibonacci price relationships that come together within a relatively tight range within the context of a zig-zag corrective pattern. In the two-step example in Valero (VLO), the zig-zag pattern created a cluster zone at the $24.62-$24.67 area. The actual low was made at $24.68 which was just a penny above the zone. This was followed by a rally to $27.00 which was $2.32 from the low.
When I see one of these trade setup zones tested and it holds, I dial it down to a lower time frame chart for a trigger entry. A trigger is price action against the zone that tells me that it is worth placing a bet against the trade setup zone. If I am looking at using the levels for a day trade I will use a five-minute chart for an entry trigger. If I am looking at using the levels for a swing trade, I use a 30-minute chart for an entry trigger.
The initial risk on the trade setup is typically defined as just beyond the high or low that was made prior to the reversal trigger. There are times however when I will expand that risk to above, or below, the extreme of the price cluster zone which gives the trade just a little more room. My first target for any setup is always the 1.272 extension of the swing into the setup zone. Target two is 1.618 and target three is 2.618.
Now let's get to the good stuff. I have quite a few current trade setups to share on this video. In this video we are going to go over some of my current trade setups along with some recent ones that already played out. I will show you some trigger entries so you get a better idea of what I'm trying to accomplish in sharing my trade setups on this site. Hopefully this will clear up most of the confusion around my methodology.
