FOREX TRADING

Leonardo Pisano, better known by his nickname Fibonacci, published Liber abaci in 1202 in which he posed the following problem:

A certain man puts a pair of rabbits in a place surrounded on all sides by a wall. How many pairs of rabbits can be produced from that pair in a year if it is supposed that every month each pair begets a new pair, which from the second month on becomes productive?

The resulting sequence is 1, 1, 2, 3, 5, 8, 13, 21, 34, 55,… each number in the series is the sum of the two numbers preceding it. He also discovered that each number in the sequence is 1.618 times the preceding number and.618 of the next number.

Many technicians use the Fibonacci numbers when trying to determine support and resistance, and commonly use.382,.50, and.618 retracements.

It is commonly believed that a.382 retracement from a trend move will tend to imply a continuation of the trend. A.618 retracement implies that a trend change may be in the making. Technicians have adopted many such rules. My approach is different in that I do not use Fibonacci retracement numbers to determine the trend. My long-term trend is determined by a simple 89-period moving average. It is effective from a one-minute chart to a monthly chart. This moving average is the literal battleground between the bulls and bears.

My method for determining support and resistance in the direction of the main trend (which is always determined by prices either above or below the long-term simple 89 period moving average.) Most charting packages will enable you to create a simple 89-period moving average. I encourage you to look at the market this way.

My method is different in calculating support and resistance than the standard ratios with which most traders are familiar. More accurate because of the use of more data points and the way the ratios are calculated. I include as many as seven swing highs and swing lows in addition to the significant high points and significant low points in the calculations.

Let’s review the approach I use to calculate support and resistance levels. The first thing I need to identify is a trend move, i.e. a significant high point to a significant low point or vice versa. These points are the extreme boundaries of the trend.

Within these extreme points are contra-trend swing highs within an overall downtrend and swing lows within an overall uptrend. In other words, I look to “capture” the high/low points of a contra-trend move within the longer trend.

These contra-trend high/low points are swing points and are critical to my calculation of support and resistance.

The normal retracement levels of.382,.5, and.618 of the maintrend, are simply not accurate enough when the pinpointing of support and resistance becomes crucial to pulling money out of the markets.

First, it is important to understand the concept of support and resistance. In this writer’s opinion, unless you can determine precise support and resistance, most traders will achieve mediocre results at best.

Simply put, support means there is sufficient buying pressure (volume) at a given price level to halt a downtrend and resistance means there is sufficient selling pressure (volume) at a given price level to halt an uptrend. Support places a floor under the market and resistance places a ceiling above the market.

The higher the volume, relative to the range of the price bar, the more significance is given to the price level as support and resistance. I measure this in terms of ticks in a price bar. A greater number of transactions (ticks) within a given time frame (and this can be anything from a one-minute price bar to a monthly bar) when divided into the range of the bar and compared with the previous two price bars, with the mathematical result being lower, will produce a robust highly predictive power signal for market reversals.

This signal is my trigger to enter a trade. I call this signal a squat. The only thing I now need to know is where support and resistance will likely take place.

This is where my calculation of support and resistance comes in. The resulting output is four levels of support and four levels of resistance, they are: lower resistance, stopping Point resistance, upper resistance, maximum resistance (bearish levels) and upper support, stopping point support, lower support, maximum support (bullish levels).

Each of first three levels of resistance and first three levels of support are tradeable levels, as long as a squat is generated on the entry bar. The maximum resistance and support levels are normally not used for entries-unless they are a “confluence” number from a larger or smaller trend. This involves finding common prices when analyzing more than one time frame.

Prior to the development of software, it was time consuming to create these levels of support and resistance, except on daily and weekly data. We can now produce reliable, tradeable numbers on intra-day data even when highs and lows are constantly changing.

To Find Resistance

An example of resistance would be that the market has made a significant high point (SHP). Now the market proceeds to correct, contrary to the main trend and puts in a series of swing highs (SH), finally registering a significant low point (SLP). Observing the chart, you can easily identify the highest high (SHP) and the lowest low (SLP) in the trend and a series of swing highs (SH) that fall between the two extreme points. The selection of swing highs is straightforward. There needs to be a minimum of three bar highs.

To Find Support

An example of support would be that the market has made a significant low point (SLP). Now the market proceeds to rally, contrary to the main trend and puts in a series of swing lows (SL), finally registering a significant high point (SHP). Observing the chart, you can easily identify the highest high (SHP) and the lowest low (SLP) in the trend and a series of swing lows (SL) that fall between the two extreme points. The selection of swing lows is straightforward. There needs to be a minimum of three bar lows.

We will now look at some examples of Fibonacci Clusters and apply the calculations to different time frames (i.e. weekly, daily and intra-day). Check resource box for link to see charts.

Shorts can be taken at all three levels as long the entry bars are accompanied by squats. The point to remember: this resistance will be constantly updated in real time as new lows are made.

I’m Bernie Mitchell. My Fibonacci Impulse Commentary, covering the stock market and Gold, has been published since the Fall of 1999, with around 20 issues per month currently being sent to 5000 devoted readers. It primarily deals with timing the markets on a short/ intermediate term basis. To expand my audience, I am making it available free to readers. To receive my commentary by email or RSS feed visit http://feargreed.com/

Anyone with questions feel free to email us. I teach my entire method of wealth allocation personally for one flat fee with unlimited follow up to ensure that our students are prepared to make profits over time. Any investment or trading site that likes my material and would like to publish exclusive content send us an email

See charts at: http://feargreed.com/

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