The Fractal Futures Trader » Fibonacci

FibGrid: It Even Converted this Hardened Skeptic

trader7757 — Thu, 23 Dec 2010 08:01:47 +0000

If you have read even a smattering of my articles about technical trading you will know that I am skeptical of just about every technical trading technique. I have been vocal in my criticism, often to the point of sarcasm. I have labeled chart formations pure bunk, poked fun at the Elliot Waves theorists, and howled at anything resembling Gann lines, Andrew’s Pitchfork and a host of other exotic sounding technical tools. In short, I have little use for most aspects of technical analysis. Then I became acquainted with FibGrid.

I have a friend with whom I often spend time trading, David Palmer, and he uses a wide range of technical analysis tools. Needless to say, I have a field day poking fun at the endless array of odd looking lines and random chicken scratching that adorn his chart. I am sure he must tire of my endless criticism, as my needling can sometimes border on being cruel. Just the same, we continue to trade together as I have a tremendous amount of respect for his integrity and work ethic. To make matters worse, he is always trying to cajole me into giving his technical tools a try, which I generally dismiss as something akin to practicing witchcraft. Now that I think about it, I have no idea why he puts up with me; but we continue to actively trade together and I genuinely enjoy his company.

One of his favorite topics is the use of a program called FibGrid. For months I dismissed this arcane sounding program as another over-hyped tool of dubious distinction. I refused to use the program on both ethical and philosophical grounds. As a testament to David’s tenaciousness, he finally got me to install the program on one of my minor charts “just to prove him wrong, once and for all.”

Note to readers: I hate it when I am wrong about any aspect of my trading style, which is constantly evolving, and the remaining portion of this article is a frank admission that FibGrid has made my view of technical trading a bit cloudy.

I had a chance to discuss the rationale behind the functioning of FibGrid with its designer David Starr. I have to admit I was impressed with the range of knowledge Mr. Starr possessed about trading, practical application for using the Fibonacci sequence, and his grasp of the history of trading. I have to admit that the guy actually made sense, which I consider unusual for traders purveying anything having to do with technical trading or technical trading indicators.

To make a long story short, I started using FibGrid and the darn thing opened my eyes wide. In the case of e-mini trading, the Fibonacci lines generated by the program date back nearly a decade and are color coded in a hierarchy of importance.

Still, I had not traded with the program and even though the theory sound plausible, I remained unconvinced that it would work in practice.

I decided to put the program to the test, and started using FibGrid in my well attended trading room…in front of some seasoned and knowledgeable e-mini traders. I expected the program to flop miserably and I could relegate the software to a pile of other worthless software have accumulated over the years.

Then something went horribly wrong, tragically amiss, shockingly awry.

The darn program worked. Not only did the program work, it worked with amazing accuracy; and the more I used and understood the program, the more accurate it became. In short, FibGrid started to consistently add cash to my bottom line. A technical program had proven itself worthy to grace my chart and my world had been turned upside down.

Gradually, I began to integrate the FibGrid lines into my well established methodology and have significantly increased my bottom line profit. To be sure, the program has made a significant dent in my profit margin and it only gets better as I learn the nuances of the program.

Who would have thought that this curmudgeon price action trader could learn something from technical analysis? From the onset, let me say that it wasn’t me…I started using the program only to prove it was a sham, like all of the other technical analysis programs I have sampled.

Want proof?

Sign up for a free week in my trading room and watch me integrate FibGrid into my existing methodology. I will begrudgingly admit….it works like a charm and you are leaving good trades and a significant amount of money on the table if you aren’t using FibGrid.

Related Blogs

What is the Market Going to do Today?

trader7757 — Fri, 03 Dec 2010 06:24:33 +0000

I am invariably asked this question as I begin each day in the trading room. Will the market go up? Will the market go down? There is a gap up…does that mean the market is going to fill the gap immediately or maybe wait until later in the day? I almost always disappoint the individual asking the question by answering, “I really don’t know.”

Even worse, I really do not know.

Predicting which direction the market will move can be one of the most embarrassing propositions for any trader to undertake. Of course, you have at least a 50% chance of being right, which is some consolation. Generally speaking, though, I don’t have the slightest idea which way the market will move, and many find this disturbing. As a trader, many think you ought to have some general idea as to which direction will move. But I am a scalper, and I don’t concern myself with predicting which way the market will move.

I am looking to catch areas of momentum and ride that momentum until it subsides. Instead of knowing which way the market is going to move, I am simply hitchhiking a ride as the market moves in one direction or the other. I am quite comfortable reacting to the market as oppose to predicting what the market might do.

Scalpers use a number of techniques to identify areas of potential momentum. First and foremost, most useful information is contained in the actual price action in the market. Oddly enough, price movement is often ignored in favor of a variety of oscillators, rate of change indicators and a number of exotic charting systems. I am not interested in many of the popular predictive systems like Elliot Wave analysis, Gann Lines, or systems of a similar ilk, but I want to make sure I point out that my opinion does not imply these systems do not work. My point is a simple one, these systems do not work for me and I do not use them.

No, I am far more interesting in support and resistance, trend lines and momentum. I have an important maxim: Trade primarily with the trend. I allow myself one countertrend trade per day, and that is usually one too many; but there are many very enticing set ups that occur countertrend and learning to lay off these trades is a challenging job. Most traders find that countertrend trading is an unprofitable method in which to trade. Further, the empirical scientific evidence bears out one indisputable fact; trading against the trend is far less profitable than trading with the trend. For a scalper, trading with the trend the majority of the time is imperative.

I also employ, in varying degrees, forms of Fibonacci analysis. I have never been convinced that the underlying principle of Fibonacci is valid; that is, the market moves in natural cycles that can be predicted using the Fibonacci sequence. One thing I know for sure is that enough people trade using Fibonacci analysis that the system works. Whether Fibonacci works because so many people use it or it is intrinsically valid is of little consequence to me; I don’t care why it works, I only care that it does work and therefore employ some tenets of the system in my trading.

In summary, I am a scalper and I am interested in momentum in the direction of the trend. I don’t use predictive trading systems; I rely upon price action, support and resistance, trend lines, and some limited use of Fibonacci analysis. I keep it simple and try not to overload my methodology with extraneous charts and unnecessary information. Scalping is not for everyone, but it is a very effective method in which to trade.

Related Blogs

Use Fibonacci Retracements to Enhance Your Day Trading

trader7757 — Thu, 24 Jun 2010 05:48:17 +0000

Fibonacci retracements are one of the most talked about tools in a traders arsenal. Yet, they are consistently misused and poorly understood. Used properly, Fibonacci retracements can be a very valuable asset to your trading, but they must be use with precision and in the proper context.

This short video will give you an excellent overview of some of the ramifications and applications of using Fibonacci retracements and I highly recommend taking 5 minutes away from your trading to watch the video. There are some great revelations about the use of Fibonacci retracements you won’t want to miss.

http://www.ino.com/info/570/CDXXX/&dp=0&l=0&campaignid=3

Fibonacci Retracement and Extension – The Holy Grail in Trading!

trader7757 — Tue, 26 Jan 2010 23:18:00 +0000

Did you find the Holy Grail in trading? If you know when to enter the market and when to exit the market at the right time, you have found the Holy Grail in trading. Fibonacci Retracement and Extensions is the Holy Grail for many traders. They trade by these Fibonacci Levels. Fibonacci sequence is a famous sequence that appears quite frequently in nature. Fibonacci sequence is obtained by adding the last two number to obtain the next number. The first two numbers are 0,1. After that just add the last two numbers to obtain the next number. Fibonacci sequence just develops like 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55,89,144,233,377 and so on.

Ratios obtained by dividing a number in the Fibonacci sequence with the number before it and with two numbers before it are always the same. These two numbers 1.27, 0.618 and 0.382 are very important and occur frequently in nature. These three ratios are used to construct Fibonacci Retracements and Extension Levels.

When there is a trend, price action is steadily going higher or lower. In case of an uptrend the price action makes higher highs and higher lows. While in case of a downtrend, price action makes lower lows and lower highs. This is hard to explain in words visualizing but I will make an effort. It is much better explained in front of a price chart. In case of an uptrend, price action starts from the support A, goes to resistance B, bounces back retraces itself and reaches a newer support C somewhat higher than A bounces back and reaches a higher resistance D before it again bounces back and reaches a still higher support E. So the price action can be broken into these three segments AB, BC and CD.

Now let’s start and draw Fibonacci Retracements. From B when price action bounces back, it retraces the past price action and the most likely place for the new support is one of these Fibonacci levels 0.382, 0.5 or 0.618. Either the price action is bounce back close to 0.382 level or 0.5 level or 0.618 level and then move back to the new resistance. This new resistance will be higher than the previous resistance at B. This new resistance can be at 1.27 or 1.618 from B.

Now while constructing Fibonacci Retracement and Extension, we will start from price A. Calculate the price difference between A and B. Take the three ratios 0.382, 0.5 and 0.618 for this price difference and plot them on your chart. Don’t worry, your trading software will do that nicely for you automatically but you need to understand the concept. Suppose the price difference between A and B is 100 pips. If the price bounces back from 0.382, we say that the retracement was 38.2%. If is bounces back from 0.5 level we say that the retracement was 50% and if it bounces back from 0.618 level, we say that the retracement was 61.8%.

After the market bounces back and takes a U turn at one of these retracement levels and rallies to the point D we say that the market has moved 27% above the original move AB or a total of 1.27%. Now if you want to become a serious trader no matter what market you trade, you should learn Fibonacci Retracement and Extension.

Mr. Ahmad Hassam has done Masters from Harvard. Get the Ultimate Swing Trading Software FREE. Learn Fibonacci Retracement!

How Really Useful Are Fibonacci Retracements

trader7757 — Fri, 22 Jan 2010 21:05:44 +0000

Is there any real value in predictive statistics that traders seem to pull out of thin air? The proponents of the random market theory (efficient market theory and it’s many variations) would say “absolutely not.” But the army of Fibonacci proponents and a sea of floor traders who use them beg to differ, because they have watched prices stop on Fibonacci numbers time after time. The question, then, is a simple one; Someone has to be right and someone has to be wrong, why do the market adherents in each camp disagree on something so fundamental?

Do you find it ironic that we understand the more about the subatomic world of molecules than we know about how the market and it’s functions? Some of the best and brightest academics claim there is no predictive ability in using Fibonacci trading. Why? The science of predictive indicators does not pass the litmus test of scientific legitimacy. If you have ever traded Fibonacci numbers, can you tell me whether the market will turn on 38% retracement, 50% retracement, 61.8 retracement? That’s the problem academics have with these systems, there are no empirical facts. Yet many traders swear by them and are very successful in trading them profitably.

Welcome to the world of day trading. It’s a world where traders use systems that are wildly varied and the results are unpredictable. Because the functions of the market are not well understood, as evidenced by the universe of varying opinions on market price action, you will find a plethora of divergent theories and traders who vociferously defend the system they trade to the exclusion of other trading systems. Further, you are unlikely to find two traders who trade identically, even if their investment philosophy is identical.

Let’s start with the Fibonacci numbers. The ratio used to calculate this set of numbers is 1.618 and it stays constant throughout the sequence. Originally identified by mathematician Leonardo Fibonacci in the thirteenth century, their popularity has increased exponentially in day trading. The question is whether they work, and why do they work. Anyone who has traded Fibonacci numbers comes to realize that the market often pauses, sometimes turns, and often blasts right through the sequence of Fibonacci retracements. There is no denying the numbers are relevant, and traders pay attention to them.

But why does the market stop and start so often on these numbers? In trading we don’t necessarily worry about the “why” questions, if something works or has predictive value it is used. You cannot necessarily predict which Fibonacci number the market will choose to honor. On the other hand, many people identify market high and possible lows using Fibonacci ratios, but any trader could identify these point using the alternate method of support and resistance. Yet this support and resistance often occurs right at the 50% or 61.8% Fibonacci levels. Sheesh…..

It is my opinion that Fibonacci numbers work just fine, but the reason they work is because so many technical traders use the system. When the market makes a move from trough to peak, most technical traders will immediately add the Fibonacci retracements to the entire move, and hence the system becomes a self fulfilling prophecy. And that’s okay. Many true Fibonacci traders take offense to this explanation, and claim there is relevance in the ratio. Perhaps there is, but I’m not buying that explanation. As a chaos theory adherent, I feel the only scientifically relevant explanation is the self-fulfilling prophecy argument. The Fib people point to ancient architecture and a wide variety of natural phenomena that use the Fibonacci sequence. It’s true, lots of ancients architects and unexplained phenomena have relevance in their respective fields, but I cannot connect the dots. Which is to say, “yes there are Fibonacci numbers all about, but what does that have to do with investing?” The answer is a resounding “nothing at all.”

But I still use Fibonacci numbers in my trading…

As a day trader, my job requires me to take profitable trades. Whether the Fibonacci sequence is scientifically verifiable is irrelevant to me, as I am only concerned with profitable trades. I cannot recommend using only Fibonacci ratios in your trading. However, I always trace in the retracements after a significant market move, up or down. You would be surprised how often the market honors them, too. I especially like to trade the Fibonacci when it has already stopped and turned on a specific number, as this establishes real legitimacy for this point on the chart. Then I can go to work trading, based on the info the Fibonacci has imparted.

So there you have it, the reason the Fibonacci ratios work is unclear, and I am unwilling to bestow mythic credibility based on the history of the ratio. On the other hand, there is no denying the market pays attention to these numbers. Whether I believe they are a self-fulfilling prophecy is irrelevant, because as traders we only deal in profitable trades and growing account balances. The “why” just doesn’t matter.

ES Emini Day Trading: Detailed ES Trading Chart

trader7757 — Tue, 24 Nov 2009 01:19:39 +0000

Chart courtesy of AMP Trading, get a free demo account and paper trade.

detailed ES Emini day trading chart ESZ9 for Nov 23, 2009

Well, the market started out with a great up move and then sort of unwound for the rest of the day. Notice that I put the Fibonacci replacements in the chart and the market found support at the 61.8% level and then hovered above and below that level for quite some time.

It was not an exciting day to trade, though I had to fight impulses as the market faded of the highs to stay and in the trade and let it ride. Not an easy thing for a devout scalper, but I managed to stick by my guns. The volume, as it has been for quite a while, was not overly impressive which, in my mind, doesn’t point to a terribly robust market. We shall see.

New Video: Is Crude Finally Heading Higher

trader7757 — Sat, 07 Nov 2009 01:16:10 +0000

A Quick Update on the Crude Oil Market

I was just looking at the charts and they are beginning to look very, very bullish. The formation I show you in today’s video is a classic continuation pattern to the upside. This pattern also confirms a Fibonacci target number we are looking at.

This video is short and to the point and I think it will get you thinking about this energy market.

Click here to see where crude oil is headed

As always our videos are free to watch and there is no need to register. After you watch the movie, please feel free to comment on blog.

Has the S&P Index Topped Out for the Year

trader7757 — Tue, 27 Oct 2009 20:04:52 +0000

There is compelling evidence that we may have seen a top in the S&P index. In this new short video, I show you the evidence that I have found which may point to the fact that we are going to see a correction in this index.

While the S&P index needs to put in more work to create a major top, there are early signs that this may be happening. I think when you watch this video you will come to the same conclusion as I did in regards to this market.

As always our videos are free to view and require no registration.

CLICK HERE FOR THIS INSIGHTFUL LOOK AT THE POTENTIAL DOWNSIDE IN THE S AND P