Tuesday, August 17, 2010

Fibonacci Placement

In response to reader queries on Fibonacci Placement, here are a few examples and basic rules for daytrading using Fibonacci.

In the first example, AMZN opens at the PDH or within the previous day's range, so we place Fibs as depicted below, from PDL to PDH. The objective here is to see if price will hold the upper range as support or retrace back to the 38-62% Fib. retracement zone. Either way, we can plan a trade. In this case, AMZN consolidates the gap in the upper range, and we wait for the rising 5 period EMA to get comfortably close to the price action before setting up the trigger point. The NR7 (NRIB) gives us a perfect low risk entry. AMZN rips to the 50% Fib. extension, we lock in some profit. After filling the gap from last week's market meltdown, AMZN is done.


ANR gaps and opens above the PDR, so we place the FIBs from the PDL to the ORH. Again the objective is the same. Here the opening range retraces back into the R-zone, so we look for an opportunity to buy a base within, or just above the R-zone. If we miss it, we can still plan to trade the break of the ORH.

The ANR example above is what I was trying to do with RIMM yesterday, but it didn't retrace enough for me to set up a trade. So if we miss the retacement, we enter on break of ORH/L.

RIMM didn't have a particularly wide gap yesterday or a wide opening range, so we use the opening price to determine Fibonacci placement.

As you can see from the chart below, I exited the second half of my trade when price reached the full extension.

The next two examples show how to place Fibs. for wide momentum gaps with a wide opening range. The wider the gap, the longer it needs to consolidate the gap before it can expand further. As a general rule, you don't want to trade a gap in the direction of the gap, until the rising or downsloping 5 period ema on a 15 minute timeframe, is in reasonably close proximity. Fib placement encompasses the opening range to the pivot high/low after you are satisfied that price and 5 ema are in close enough proximity.

POT was a massive gap on an unaccepted takeover bid. Here we place our Fibs from the ORH to the pivot low and wait for a satisfactory base. If price stalls and reverses in the ambush zone (50-62%), prepare to bail. Here we close above the ambush zone, so we presume we are safe. I locked in some profit when price moved back into the zone. Essentially, price was consolidating ahead of the next leg up.

SNDK is a trade I described last week, but the same wide gap rules apply.

Hope this is helpful. Keep in mind that the daily is your anchor. Prior gaps can act as resistance as was the case for ANR, and gap fills can mark the end of the move as per AMZN. Fibonacci lines are a useful trading tool, but you should also look at the daily to help determine reasonable targets. Retracement zones should fairly match areas of prior consolidation. Prior consolidation zones can act as support or resistance.

P.S. - There are many other ways to place Fibanacci lines when trading chart patterns as well as looking for ambush trades. The examples described above are basic Fibonacci 101.

8 comments:

ciscochen said...

Jamie,

thanks for your detailed explanation, much appreciated.

Black said...

Great post. Saving this one.

catherine said...

Hey guys,

Thanks for the explanation! That's very helpful! I'm going to keep this in my study binder and will try using these fib placements!

cheers!

Jamie said...

Great, thanks for the feedback!

jordan said...

Jamie,
The examples and explanation are very helpful! Thanks for taking the time to do this

joshua said...

I agree. Excellent post!

jfibs said...

enjoyed the post. BTW, has CRM looks to have formed a two day double top like the SPY's did last week. short in the 108 area to cover near 103?

Jamie said...

jfibs,

The double top on the SPY last week had two daily candles with upper shadows. In other words, on both days, sellers pushed prices lower into the close. CRM closed on its highs Friday, and close to its highs today. I'm not bearish on CRM yet. I traded it long again today. It looks like it is consolidating Friday's gains in the upper range, which is bullish. However, if the markets sell-off CRM could weaken. As you noted 1st level support is $108 , gap support is around $104.