Archive for the ‘fibonacci’ Category

More Notes on FibGrid from a Technical Analysis Skepticyes,

Years of trading experience has reinforced a single, indisputable fact; prices tend to stop and start along common lines.  The reason for these phenomena is poorly understood, as is the position of the exact point these lines utilize for their stopping and starting points.  This observation is not an extraordinary revelation for anyone who has spent any length of time in front of a trading chart.   Often called support and resistance lines, these stopping and starting points are evident when observing the price action on any futures or stock chart.

The world of Efficient Market Theory would have us believe that these areas of support and resistance are the result of random market movement where supply and demand are in equilibrium.  In an academic sense, this explanation makes good sense, as there does not seem to be a discernible pattern in either the lines of support or lines of resistance.  It might also be useful to note that once a line of resistance is passed through by the price action, it often becomes a line of support, and vice versa when considering support lines.  In short, it is common for most lines to be, at one point or another, both support and resistance; it all depends upon the time period under analysis and the movement of the underlying assets price action.

There have been a wide variety of attempts to quantify the location, or predicted location, of these support/resistance lines.  Floor traders pivot points have been a popular support/resistance predictive device for quite some time, and can be very useful.  On the other hand, pivots points can often be far off the mark and, on some days, completely irrelevant. There is no reliable way to determine on which days the market will honor floor traders pivots and which day they ignore them.  That, of course, creates a problem for traders and pivot points…it is difficult to discern which day to use pivot points and which day to ignore them.

FibGrid on the other hand, has added much needed clarification to the support/resistance equation. As anyone who has consistently read this blog can attest, I have been a long time critic of the vast array of technical trading tools that have come to market.  Everything from goofy robots, to elaborate charting programs have all been tested and found wanting.  But this darn FibGrid actually works, and I have been forced to retract my iron clad condemnation of technical trading programs.  It is most embarrassing.

David Starr describes the program most eloquently:

“The tendency of financial market movements to be proportional to other movements in ratios that have Fibonacci proportions is well documented. For example, many know that prices often retrace 38. %, 50%, or 61.8% of a move. Others know of some of the common projection ratios and we use many of these in our analysis. Less known is the FibGrid technique that projects a series of possible support and resistance levels based on projections from the beginning stages of the last bull market of significant degree.

The amazing thing is how prices tend to find these support and resistance levels that were projected from prices years earlier (sometimes even decades earlier) and those projections provide levels that are meaningful in almost all timeframes, including short day-trading timeframes. This 2584 share chart of the emini Dow futures shows how price obeys FibGrid levels on intraday movements. The key values for the projection of these levels were set back in 2002 and the support/resistance levels shown today have not moved since then. Prices still find them.”

I use FibGrid in my trading room and wouldn’t consider trading without the program running.  There are many lines that appear in the FibGrid program that might normally be ignored by the average trader, yet time after time I notice price action stopping on these less than obvious lines, sometimes right to the exact tick.

It would be difficult to calculate how many point I have made or been prevented from losing using the FibGrid program, so my endorsement is primarily anecdotal; but I am often astonished at the accuracy of this program in identifying support and resistance.

I would like to point out that FibGrid, in and of itself, is not a complete trading system.  This program will only make you existing trading system far more effective and profitable.

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FibGrid: It Even Converted this Hardened Skeptic

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.

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What is the Market Going to do Today?

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.

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