Fibonacci ratios

[Sunil]

This is in response to some questions about the correct use of the different Fibonacci ratios.
I have enclosed the specific uses of the different ratios and where they should be used ideally. The technical details of the different levels, specific rules etc have been covered in the lessons & one can refer to the presentation slides for the details of the same.

Fibonacci Retracements to be used to determine the extent of a pullback.
If price finds support/resistance at a precise fib retracement level, then one can expect a reversal from here.
The retracement levels give the trading parameters and they can be used to determine the entry & stop levels, and to determine the levels of the trailing stops.

Fibonacci Projections to be used to determine the price objectives, after price crosses the retracement levels.
They can be used specifically to determine the price objectives of Elliot waves and Harmonic patterns.


Fibonacci Expansions should be used specifically to determine the price objectives of a 123 pattern.
Since a 123 formation gives 3 points, the fib expansions take into account the impulsive wave and the pullback (the corrective wave) to project the price movement forward.
It is most effective for a 123 formation which has formed after a change of trend.

Fibonacci Fans to be mainly used for estimation of the price movement within a trend.
Applying the thumb rule, price has to enter the first fib channel to indicate a pullback.
Secondly, if price has crossed into one fib channel, then it is expected to travel to the other end of the channel.
Hence the trend should remain in place.
The 88.6 is an important level.
The break of an 88.6 level indicates a shift in momentum and one can get an early indication of the expected change.
Fans can also be used to determine future levels of support/resistance. Plot the fans on larger time frames, to get the larger picture of the trend. The fan channels are the levels where price could ‘potentially’ move to.

I have tried to be as brief and precise as possible & in case there are any further questions, please feel free to post them in the forum.

Sunil.

[HenryChidgey EAU/USD]

Howdy Sunil,
I have a little confusion surrounding Thumb Rules for Fibonacci Expansion. On that slide in our recent class it says “ A break of FE 50 is an indication of the continuation of the trend. And subsequently, the break of the FE 78.6 becomes the confirmation of the change.” Should this have said “… the confirmation of the continuation of the trend.”?
Thanks,
HenryChidgey EUR/USD

[tmac]

Hi Sunil,

I've enjoyed your sessions - very precise and beautifully explained.
I wonder if you could do a short talk on harmonic patterns on Wed night?

Thanks

[Sunil]

Howdy Sunil,
I have a little confusion surrounding Thumb Rules for Fibonacci Expansion. On that slide in our recent class it says “ A break of FE 50 is an indication of the continuation of the trend. And subsequently, the break of the FE 78.6 becomes the confirmation of the change.” Should this have said “… the confirmation of the continuation of the trend.”?
Thanks,
HenryChidgey EUR/USD

Hi Henry,
I suppose it should have been worded somewhat differently.
Let me try and clarify it further -
If we are looking at a downtrend, and price closes below the FE50, it is an indication that the downtrend may be developing.
Once it closes below the FE78.6, then we can say that the momentum is definitely bearish and one can look for further down moves.
So, your words of " confirmation of the continuation of the trend" would be correct :)
I hope this makes it clear.
Sunil.

[Sunil]

Hi Sunil,

I've enjoyed your sessions - very precise and beautifully explained.
I wonder if you could do a short talk on harmonic patterns on Wed night?

Thanks

Hi tmac,
Unfortunately Wed nights is scheduled exclusively for setting up the Metatrader charts.
But I will make it a point to go over the harmonic patterns in brief, during the Sunday night sessions.
Sunil.

[HenryChidgey EAU/USD]

Hi Henry,
I suppose it should have been worded somewhat differently.
Let me try and clarify it further -
If we are looking at a downtrend, and price closes below the FE50, it is an indication that the downtrend may be developing.
Once it closes below the FE78.6, then we can say that the momentum is definitely bearish and one can look for further down moves.
So, your words of " confirmation of the continuation of the trend" would be correct :)
I hope this makes it clear.
Sunil.

Yes Sir Sunil, that is very clear!
Thanks,
Henry

[Sunil]

Hello everyone,
I received some mails requesting further explanations on the correct use of Fibonacci ratios.
In response, I have tried to simplify it further and I hope this makes it more clearer.
Please correlate this explanation with the slides you have received of the Fibonacci class.
I am putting up the explanations of the Fibonacci Retracement and the Fibonacci Projection levels here. If these are satisfactory, I will put up similar ones for the Fans and Expansions.
Basic rules for plotting Fibonacci ratios –
Fib ratios always to be plotted from the left side to the right of the chart.
Fib ratios always to be plotted on pivot points. Visually identify the points from where price changed trend from. In short, we would be identifying the waves of the price movement.

Fib Retracements –
Price always moves in waves and within an existing trend, we use the Fib retracement levels to identify possible levels of support/resistance….from where price would bounce and resume the trend.
In an existing uptrend, we wait for price to retrace to the down side –
Identify the swing low and the swing high points of the uptrend and plot the Fib retracement from this swing low to the swing high. (From left to right)
Price is expected to find support at any fib retracement level – 38.2; 50.0; 61.8 or 78.6.
If it breaks 78.6 towards the down side, it means the momentum has turned bearish. Thus we can conclude that this is not a pullback, but a reversal.
In an existing downtrend, we wait for price to retrace to the up side –
Identify the swing high and the swing low points of the downtrend and plot the Fib retracement from this swing high to the swing low. (From left to right)
Price is expected to find resistance at any fib retracement level – 38.2; 50.0; 61.8 or 78.6.
If it breaks 78.6 towards the up side, it means the momentum has turned bullish. Thus we can conclude that this is not a pullback, but a reversal.

Fibonacci Projections
Within an existing trend, we use the Fib projection levels to identify further price objectives….after price has found support/resistance at the Fib retracement levels.
We thus, expect the price to resume the trend and the Fib projections give us the expected levels, where price could reach.
In an existing uptrend, we wait for price to find support at any Fib retracement level.
Once price resumes the uptrend, we identify the swing high and swing low of this pullback (which found support at a fib retracement level)
For expected bullish targets, we plot the Fib projections from the swing high to the swing low of the pullback down.
Price is expected to reach the 127.2 or 161.8 Fib projection levels. (In strong trends, it goes up to the 261.8 level)
In an existing downtrend, we wait for price to find resistance at any Fib retracement level.
Once price resumes the downtrend, we identify the swing low and swing high of this pullback (which found resistance at a fib retracement level)
For expected bearish targets, we plot the Fib projections from the swing low to the swing high of the pullback up.
Price is expected to reach the 127.2 or 161.8 Fib projection levels. (In strong trends, it goes down to the 261.8 level)

Sunil

[iluvgravy]

Sunil howzit,

These Fib rules that you have very simply laid out are very cool.
In fact cool like a good vindaloo :D

I would like you to post similar for the fan and expansion

Good man!!

Thanks

[BillTainter]

Wow, Sunil, this trade tonight was magical.

EUR/USD - 5 MIN chart - Sunday 4/19/09
(4:50PM CST) Pivit High - 1.3052
(5:15PM CST) Pivot Low - 1.3018
Plotted Retracement Fib from Pivot High to Pivot Low
(6:05PM CST) Retraced to near 88.6% - 1.3048 High (Did not close above 88.6%.
(6:35PM CST)Confirmation - Closed below 23.6% of Retracement
I entered SHORT 3 LOTS = @ 1.3021.
STOP LOSS at Pivot High - 1.3052
I then Drew Fib Extensions from Pivot High to Pivot Low
Set Limits at 127.2% Ext and 161.8% ext, 261.8% ext.
(7:00PM CST)TP1 at 127.2% (1.3008 for 12 pips x 2 = 24pips)
I normally have TP2 at 161.8% (1.2997 for 24pips) I accidentally deleted the Limit, ha ha to my benefit as it hit near my 261.8% extension
(7:45PM CST)I closed the trade on the final lot at 1.2980 for 41 pips.
Total trade 65 Pips.
I am paper trading this for the week and will look to go live next week.

Last week I had a night 100% accurate - 8 for 8 winning trades and made 150 pips on 5 min charts.

Sunil your Fibonacci rules have empowered me to quickly learn an approach, paper trade it with success and I am optimistic next week I will be live trading with this approach.
I am excited to make money while I am learning more and more.
Thank you and God Bless.
Bill Tainter

[Sunil]

Hi Bill,
That was an excellent trade and one which we could call as a "text book example".
As you mentioned, having a set of rules & following them step by step is a large part of the successful trade.
Great going, Bill and keep it up.

I would like to point out a couple of points & have enclosed the charts for reference -
1.) Ideally the Fib retracement levels should be plotted from the previous swing high, since that is a "pivot' point...from where price changed direction.
Now fibs are very accurate and this did coincide with the fib levels that you mentioned.
2.) You mentioned that you plotted the Fib extensions for the target from "Pivot High to Pivot Low".
These would have been plotted from the "Pivot Low to the Pivot High" (of the pullback).
I am sure you plotted them correctly, since the 127.2; 161.8 & 261.8 levels match your values...and it was just an oversight in writing.
But, I wanted to point this out, as it could cause some confusion.
And I believe this trade should be archived as a perfect Fibonacci trade.
Regards,
Sunil.

[pipsterado]

I am new to the OU and using Fibs. I have been a student of Joe's for the past 2 1/2 years and looking for more tools to trade with. I was wondering if the followinf chart could be critiqued by Sunil or another student with experience. Thanks

Jim

[pipsterado]

Sunil,

I finished watching your class from 4-24-9 and you showed a bit on how to use fans. As I was watching and you moved your cursor w/ cross hairs the time and date moved into the future past the right side of the chart. At that point where the time and the price cross the fib line could that be used as a prediction area or give you an idea when to get back to your computer if you are away?
I have attached a picture to help illustrate what I am trying to explain. I have marked fan A, 3 horizontal lines X, Y and Z and vertical line T for the time.
If I follow where the horizontal lines cross line T at those points in time could they be used to determine if the pair is going to continue to move in the current move or reverse.
I hope I explained this ok

Jim