Good day! For those of
you who could not make
it to the previous classes, the link for the logs are as follows:
Support/Resistance Part 1:
Support/Resistance Part 2:
Support/Resistance Part 3:
Over the last couple of months we have
been looking at different types of support and resistance levels,
starting with the core price support and resistance and then applying
it to channels,
followed by moving averages. In today's session I am going to show you
another type of indicator support/resistance tool. I will be giving an
overview on utilizing
fibonacci retracement levels in your trading.
The Fibonacci Series upon which these
levels are based upon is a result of the work of an Italian
mathematician named Leonardo Pisano, which went by the name
"Fibonacci". In case this sounds a bit odd, it is
merely a contraction for "Son of Bonacio", who was his father. He
observed that in nature there are
certain patterns that appear to crop up and introduced a series of
numbers to identify these patterns. The sequence of the Fibonacci
0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89,
144.... up to infinity.
Starting with zero and adding one begins
the series. The calculation takes the sum of the two numbers and adds
it to the second number in the addition. This is very exciting to you I
am sure up
to this point! :)
Where Fibonacci comes into play in the
market, however, is that after the eighth sequence of calculations,
there are constant relationships that can be derived from the series.
For example, if you divide the former number by the latter, it yields
34/55 = .618181 ~ .618
55/89 = .617977 ~ .618
89/144 = .618055 ~ .618
Dividing the latter number by the former
number derives another relationship from the sequence. This
relationship yields approximately 1.618.
55/34 = 1.617647 ~ 1.618
89/55 = 1.618181 ~ 1.618
144/89 = 1.617977 ~ 1.618
Traders use these ratios to make projects
upon a stock or commodity's price moves. When I first began trading, a
mine introduced me to the fibonacci series. Coming from a background in
I was already aware of its application in other areas, so it intrigued
me that it would also work in the market. I began to play around with
Fib levels. I
kept it very simple. The main Fib levels I use are listed on
our charts page. They are 138.2%, 100%, 61.8%, 50%, 38.2%,
0%, and -38.2%. Two other numbers often used when
applying Fibonacci numbers to chart analysis, 0.786 and 1.27, are the
square roots of 0.618 and 1.618. I do not use these myself and never
but you will likely see them referenced from time to time if you decide
to go more in depth in studying Fib levels.
FIGURE 1 - Fibonacci Levels
I began as an equities trader, but I
quickly discovered that while Fib levels will work in the equities
market, the probability is even higher in the commodities market. I
have no idea why this seems to be true,
but for that reason, I tend to use them more when trading the EMinis
than anything else.
Now, those of you that know me well know
that I actually use very little for indicators anymore and often do not
even show my moving averages, but this has more to do with being able
to read the pace and use price support and resistance for identifying
the turning points in the market and less to do with the validity of
the indicators. I just like to keep things the least
cluttered as possible. Both moving averages and Fibonacci
levels, however, are very good visual tools to assist in identifying
major support and resistance levels in the market.
As a bit of a quick review, remember that
as with any support or resistance level, the faster the momentum or
pace of a move into a fibonacci level, the more give it will have. We
will see this a little later using an
example from this morning of a support level I called in the room.
One of the things people tend to find
daunting with fibonacci levels is exactly how to draw them. They get
rather wrapped up in what trend
move to use to apply the tool too. In all honesty, it doesn't really
as long as you deal with a complete trend move. What this means is that
if you are
looking at a downtrend, then once you no longer have lower lows
and lower highs then you can use that trend move to apply the fibonacci
levels to. Trend channels, as discussed several
weeks ago, are also a helpful tool, since once a trend channel breaks,
that means you can also use that trend move to apply fibs to.
Let us look at a couple of examples. Please refer to Figure 2.
FIGURE 2 - ES Fibonacci Support/Resistance
This is the trend move that we were
following yesterday morning. It contained the typical three waves and
was the breakdown move out of the prior day's congestion. Once the
downtrend channel broke shortly
after 11:00 am ET, then you can use your trend tool set to fibonacci
and connect the highs of the downtrend move to the lows of the
downtrend move. This projects each of the fibonacci
levels from that point onward.
What I find intriguing about Fibonacci
levels is that when I draw them on a major trend move, such as on a 15
minute time frame, if I leave them in place overnight, the will
continue to hold in days to come, even as more trends are created on
that same time frame. Obviously if you continue to do this
without cleaning it up then your charts will become rather cluttered
FIGURE 3 - ES Fibonacci Support/Resistance
The image in Figure 3 is the same one as
in the previous chart, but it shows the projections of the fibs, along
with the s/r levels identified. Notice that heading into noon the
momentum was on the stronger side, so on the second wave of upside off
the lows, after first stalling at the 38.2% retracement, the ES
continued past the 50% level and into the 61.8% zone. When a
continuation pattern is forming,
it is rather common to see a security chop around between the 38.2%
level and 61.8% level before breaking higher. You can use this to help
targets on a breakout. When the prices are evenly displaced
between those two levels, then the price projection on a breakout is
also an equal move projection as per our discussion on pure price
support and resistance levels from early last month.
FIGURE 4 - YM Fibonacci Support/Resistance
Fibonacci levels are not limited to the
retracements within a trend move. They can also project price targets
support and resistance levels and lay outside the scope of the trend
move itself. For instance, if we look at the three
wave trend lower into almost 12:30 on the 11th off the 11:30 ET highs,
then we can connect the highs of that
trend to the lows of that trend move on this smaller 2 minute time
frame. It retraced back into the 61.8% level
before continuing lower.
FIGURE 5 - YM Fibonacci Support/Resistance
When it broke lower into 13:00 ET (as
shown on Figure 5), you will see that it proceeded to the next
Fibonacci level. In this case it was the -38.2%
retracement. This helped predict a bounce off that
price zone. The YM then fell into a range between the
0% and -38.2% retracement levels before triggering a third wave of
selling into 15:15 pm ET.
FIGURE 6 - YM Fibonacci Support/Resistance
By stepping back a time frame to the 5
minute charts, once can more easily discern this new trend. It had
three strong waves of selling and
then reversed into the close.
FIGURE 7 - YM Fibonacci Support/Resistance
Following that reversal, the first
resistance it ran into was a combination of not only the price
congestion from mid-afternoon, but it hit the 38.2% fibonacci
retracement level on the head. When dealing with congestion zones, it
can be a little difficult knowing where in that zone the move will
stall. By adding a fibonacci level, it can help
narrow down the price a bit more accurately. The second resistance
level after the
lows was also a price resistance level at the prior highs. This was the
100% fib retracement. After prices reversed at that point, they
fell into the 61.8% level and held almost perfectly once again. Again,
however, also note the price
support from the previous day. Whenever you have these combinations of
support or resistance zones, those levels are going to have more
strength to them. If you want confidence, this is one way
to build it. If you cannot identify more than one
reason for a support or resistance level to hold, the chances are less
that it actually will, or that it will to any significant degree.
FIGURE 8 - ES Fibonacci Support/Resistance
Fibonacci levels work for both intraday
and all sessions time frames in the commodities market. The term "all
sessions" refers to trades
taking place outside the 9:30-16:00 ET time frame. I actually didn't
get to sleep last night
because I was trading the ES at that time. :)
After catching the 3:00 ET reversal, I
wanted a way to project price levels for support as the morning
progressed. Knowing I had this class today, I threw
up the FIb levels for the ES based upon that morning rally which began
at about 23:00 yesterday evening.
FIGURE 9 - ES Fibonacci Support/Resistance
While not perfect, notice that each of
the major stalling points on the 3 minute time frame fell at a
Fibonacci price zone. When the market fell apart at 7:00 am ET
it barely took a second to notice the 100% retracement level and
dropped into the 138.2% instead. Since the momentum was so extreme, the
exact prices surpassed the exact price of the fib level, but notice how
it still congested at it. This shows that despite the slightly
lower lows, it still reacted to that fib zone. The market then popped
back into the 100%
retracement level and continued later on into the 38.2%. Once again the
was on stronger momentum. Heading into the open it fell back into
the 100% and price support. This is at #5.
FIGURE 10 - ES Fibonacci Support/Resistance
As trading continued past the open, these
fib levels from the wee hours of the morning continued to hold. The
resistance level I gave early in the
day at 9:53 was based upon the 50% retracement, which combined with
earlier price congestion. The support I then posted at 10:04 was a
reflection of the 138.2% retracement, as well as prior lows (#1).
FIGURE 11 - ES Fibonacci Support/Resistance
Since that move from around 3 am to 7:30
am broke higher just prior to the open, another set of fib lines could
or adjusted, to fit the new trend. This trend off the lows was choppier
only broke around 10:00 when it failed a new high, making it a two-wave
correction move instead of three-wave uptrend. You could use that move,
however, to then
project lows at the 138.2% retracement. Some may have used the 8:30 am
low to the
9:00 ET high and just watched that more concise move. The zone of the
138.2% on that would have
been about the same. You would have had to have considered the fact
that the momentum was very sharp into the low, hence adding a bit more
give to it. The Fib levels drawn early in the day,
however, continued throughout the session.
FIGURE 12 - ES Fibonacci Support/Resistance
Hopefully, for those of you looking to
add a bit more assistance in identifying s/r levels, you will find
these fibonacci levels to be extremely helpful. There are other
applications of fibonacci
in the marketplace as well. Some use them for time extensions to help
identify how much longer it will be until another reversal. For this
they will use a trend move,
calculate the time of that trend move and project the fib levels out in
of time. Lucas numbers or levels are another
application of similar principles of fibonacci that many traders use.
So, if inclined to follow this line of
study, these are two additional areas you may wish to explore.
I will now open the room up for
jball: good stuff
Toni: ty jerry
trauma: thanks Toni
billgi: very helpful
crack32: what fibonacci retracement do u need to
buy minolo's on sale?
six_: can Fibo levels
be used to trade stocks intraday
Toni: 12 yes
six_: thanks, Toni
Helena1045: What fib
level did we achieve today? :)
Toni: just a sec... i will show you :) We are at the -38.2%
on the daily off
that last trend move on the ES btw
FIGURE 13 - ES Fibonacci Support/Resistance
get urself second guessing which trend ie- larger trend vs using a fib
on a phoenix type of setup on faster time frame?
Not really... If I am daytrading I tend
to want to see the trend on a 15 min chart, but may draw the fibs on a
smaller time frame.
so 15 is what u use it on mostly?
Yes, but in terms of seeing the trend.
If it's choppy on that time frame I go
higher. But, then when I actually draw the Fibs, I will take the 15 min
highs and lows and
use them on say a 5 minute chart. This way I can see them as prices
on that smaller time frame. Does that make sense?
use the FIBO levels if the market is choppy? Do you use the shadow or
the body of the candel?
Always use the shadows.
you manually calculating your fib values?
I have a tool in my charting platform
that projects them. With the time extensions some charting
platforms have those as well. You will have to check though,
is not as popular.
have you ever used the time extension?
--tradesation has a stretchable grid
that I use on evry chart
I don't, but I have friends that
swear by them.
thanks for the class Toni
That was a wonderful class. Thank
another nice class !..ty toni
are welcome :)
looking for higher highs and
lows, do you include the shadows?
u next time, thanks for the good class!
don't get your daily email anymore. Do
I sign up again?
Please go to tonihansen.com and enter your address it is a double
opt-in system now so it will send you an invitation and you will need
to confirm your
subscription. It is still free of course i will post the links to the
Main page is the market action letter,
bottom of this page is the position trader,
and top of this is the educational one.
You are apart from most rooms/traders,
they don't want to reveal what they are actually doing
yeah... I know, my bf tells me that all
the time. haha.. He thinks I'm crazy.
Got burned by a couple of them in
Well, it is a way to give back after one
enjoy it so that helps... Playing
school was a favorite pasttime as a child.. Maybe that is it. lol
It is a terrible journey without mentoring
from the right person.
yeah.. i never had a mentor and never read trading books which i still
get harrassed about because
many never believe that
y are a mentor :)
picked up a lot from friends over the
years, but not realy much within my first 5 years of trading... never
really had much of a clue what
others were doing until I was already successful. Now I know what to
avoid and am more open
to hearing what others have to say, although I admit that when they
talking about complex indicators and systems I tend to tune out... In
all honesty it was because it was
simply so overwhelming. Brandon gave me books to read, but when math is
not your strong suit trying to make sense out of a lot of what
people were doing was rather daunting. So I just went with the fact
that I was
trained as an artist and just picked out the patterns myself. :)
maybe next month I can contact you and
share what I am doing, what I developed for day/micro trading stocks
got a question, how long did it take to
meka profitable or succesfull?
Toni: well after about 6 months i was breakeven but to really
gain consistency it took over 2
you did better than I. Ruined an account
I started managing money it was a
step back.. Was almost like starting over because of the emotional
aspects coming into play again. People run into the same thing when
borrow money, so I really discourage that.
ditto. The mind becomes an enemy
Well.. Ii lost about 20% at the lowest
point. That was a shared account with Brandon so we lost 20%.
you get all hung up on the
major indexes spx etc confirming what your stock
really shooting star. I like it if they do, but if dealing with news
stocks then it is not as important.
you ever trade a one candle
pullback if it is a very big candle
will drop down to a smaller time frame and use the move within the
i was using a daily candle then used the move of the smaller time frame
do I then have to trade the smaller time frame or could I go back to
can go back to the daily use the smaller for timing larger for targets.
nite & thank you very much
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