by Alan Farley
Fibonacci
jumped into the technical mainstream late in the bull market. Futures
traders had it all to themselves until real-time software ported it over
to the equity markets. Its popularity exploded as retail traders
experimented with its arcane math and discovered its many virtues.
Fibonacci
ratios describe the interaction between trend and countertrend markets --
38%, 50% and 62% retracements form the primary pullback levels. Apply
these percentages after a trend in either direction to predict the extent
of the countertrend swing. Stretch a grid over the most obvious up or down
wave, and see how percentages cross key price levels.
Convergence
between pattern and retracement can point to excellent trading
opportunities. Keep in mind that retracements work poorly in a vacuum.
Always examine highs, lows and moving averages to confirm the importance
of a specific level.
Discord
between retracement and the underlying pattern generates noise instead of
profit. Move on to a new chart when nothing lines up correctly. This
divergence generates most of the whipsaw in a price chart. Alternatively,
strong phasing between Fibonacci and pattern exposes highly predictive
reversals at narrow price levels.
Let's look at
five tricks to improve your Fibonacci skills. Add these twists and turns
to your toolbox and apply them to your next trade. I promise they'll serve
you very well in the years ahead.
First Rise/First Failure
First
Rise/First Failure marks the first 100% retracement of a trend within your
time frame of interest. It provides an early reversal warning after a new
high or low. The 100% retracement violates the major price direction and
terminates the trend it corrects. From this level, the old trend can
reestablish itself if it breaks through the old 38% level. More often,
traders will use that level to enter low-risk positions against the old
trend.
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