Fibonacci Trading And Fibonacci Gambling
Fibonacci retracement for Dow Jones
Fibonacci Trading And Fibonacci Gambling
Fast and furious, two words that best describe, modern trading community. We want it now and we want it fast. We are furious if we do not get what we want now.
Salivating like Pavlov’s dog, traders are paying total attention to the “Fibonacci retracement” levels. The seventy five per cent, seventy six per cent, seventy eight per cent, fifty per cent,
Sixty one per cent and the thirty eight per cent Fibonacci levels offer excellent trading opportunities. However, every trading opportunity carries a percentage of risk. Knowing when to buy or to sell on or near these “Fibonacci retracement” levels is what differentiates a serious trader from a gambling trader. Our aim is to explore both Fibonacci gambling and “Fibonacci trading”.
Fibonacci retracement and Gambling
After a substantial price movement up or down, the price usually retraces back to either the 38.2%,50%, 61.8%, 75%, 76%, 78% or the 88% of the previous price move. A retracement is a pull back in an up trend or a rally in a downtrend. In the up trend, the price displays higher lows and higher highs until it fails to display a new higher high. In a downtrend trend, financial instruments display lower lows and lower highs until they fail to display a new lower low.
Higher lows in up trend and lower highs in down trend are retracement levels. These levels act as support or resistance zones and are usually “hot spot trading zones” that attract huge trading activities. Fibonacci retracement trading tool is commonly used by traders to determine high probability trading zones. Like every trading tool, the “Fibonacci retracement” tool must be mastered. However, many traders resort to gambling when trading this tool by placing orders to buy or to sell willy-nilly on or near these levels hoping for some uncertain gain. Some traders will place their bet at 38.2% or at 50%. Some will place orders to enter the market at 61.8% or at 78%. These are not tested or retested trading methods but a kind of gambling. When one level fails to reward the trader, he or she will place new orders at different Fibonacci levels hoping to gain from these betting. These are bets on uncertain outcome which is completely outside the scope of serious trading. In this case traders are taking risks in the hope of gaining financial surplus. Real trading involves using a valid tested trading method within the parameters of risks management and money management. Gambling is to bet on uncertain outcome but trading is about high probability trade set ups, risk management, trade management and entry or exit strategies.
Fibonacci retracement tool is a very popular trading tool among trader. Equally, it is also, one of the most misused trading tools. Other misused trading tools are the commodity channel index, the slow stochastic and the pivot levels. These are powerful tools for serious trading, not for gambling. Very often, in the up trend, as soon as the price pulls back near the 38.2% “Fibonacci retracement” level, the first wave of traders, usually aggressive traders will rush in and place orders to buy at the 38.2% level without any other considerations or careful planning. As, we have seen it, many times, the price can break the 38.2% Fibonacci level and can continue the movement to the downside giving the first aggressive traders food for thought. The second team of aggressive gamblers will rush in and buy at 50%, then the third group at 61.8% and the last regiment of aggressive traders will buy at 76% or at 78% Fibonacci retracement level without success as the price the number one indicator continues its bearish momentum to the downside.
Now there is a thought. Fibonacci retracement levels are not magic price levels but decisions zones, where careful and smart traders can look for excellent trading opportunities. With a valid trading method, all that is needed around these “hot spot trading zones” is to keep eyes wide open ( without blinking for a while at least)and to take clear cut valid signals if any is given in these “hot spot trading zones” instead of guessing or forcing the price.
One example of this sort of gambling has been observed on the monthly chart of Dow Jones Industrial. The Dow went down from October 2008 up to March 2009 then started to rise from that point onward. Around October 2009, Dow reaches the 38.2% “Fibonacci retracement” level and was unsuccessfully challenged by the first aggressive gamblers. By December 2009, it touches the 50% zone, and went down a bit but at 61.8% Fibonacci zone around April 2010, Dow was quite favourable to those who sold it. Dow went down enough this time. After a short move to the downside, Dow resumed its up trend and around November 2010, it touches for the second time the popular 61.8% Fibonacci zone. Again, some traders did try to sell Dow but failed. Dow maintained its healthy bullish momentum and broke confidently the 61.8% level and the unusual 66% Fibonacci retracement level. It reached the 75% level in February 2011. Those who sold Dow Jones at 75% in February 2011, did not get paid but at 76% in March 2011,Dow did come down substantial and was a generous giver this time. The price came down from the 76% level down to the 66% level where, it did found a valid support before continuing the move to the upside. As we are writing this article now, this week starting from April 18th 2011, Dow is facing the toughest selling pressure in the zone of 78% Fibonacci level. This recent bearish pressure is still increasing. Fibonacci retracement levels are important trading zones, but not magic levels or fertile gambling ground for those who seek to use the market like another casino. Knowing how to use accurately Fibonacci retracement levels can assist traders in making better trading decisions instead of gambling or playing Russian roulettes with their hard earned cash.
Trading is far from gambling and there is a divergence between trading and gambling. No serious trader should be involved in gambling on or near the Fibonacci retracement zones. When the price is at a Fibonacci retracement level after pulling back in an up trend, it can perfectly break below the level and can continue the movement to the downside or can break below it , then finds a support right below it before returning back above it. The price may find support on or near the Fibonacci level and resume the up trend straight away. No one knows what the price. It can be a madness to try to predict the next price move. The best strategy will be to wait and let the price reveal the next move. This is about being patient or being a conservative trader. There are various trading methods, traders can use in these hot spot trading zones to avoid nasty surprises. A simple old fashion but reliable trading strategy can be to just wait for the trend line to be broken and to be retested then allow the price to turn around before entering the trade. Please note that this article is neither a solicitation nor an offer to buy or sell any financial instruments. It is solely for educational purposes. Using a top down trading method based on the stable data in the market that says: The higher time frame commands the lower time frames, we can combine the monthly chart and the daily chart to determine the time and the place for best entry point around these Fibonacci “hot spot trading zones”. This is a simple but powerful trading strategy that does not rely on guessing or gambling. The excitement of trading around the Fibonacci retracement levels can be very addictive and exciting sometimes but one should never forget to use stop loss and to use the five per cent money management rule. Whatever preparation is done, never ever assume anything but keep your eyes wide open and follow the price, the number one indicator.
On the 18 Feb 2011, the Dow Jones touched exactly the 76% trading zone. This can be seen on the daily chart and the monthly chart. It is important to combine at least two times frames when making a trading decision. Never ever make a trading decision on a single time frame. Never. It is a recipe for sure loss. Please feel free to quote us on that. On the 18th Feb 2011, we have noticed on the monthly chart (higher time frame) that the Dow is at a resistance zone but also at the 76% retracement level. The market is usually considered as overbought in the zone of 76% retracement level after an up trend. However, it is one thing to be considered as overbought and another to be accepted as overbought. Instead of gambling and quickly placing a confident but stupid sell order without any other considerations, it is better to zoom into the price like a cat starring at its prey and to continue to monitor carefully and closely trading activities around the hot spot trading zone. Indeed anything can happen.
Looking at the daily chart (lower time frame) on the 23rd Feb 2011, Dow has clearly broken the trend line and has continued to go down the following day (24th Feb 2011). No one can deny the bearish momentum carrying the price below the trend line. However two more verifications are needed before entry. The first is the retest of the trend line that has been broken and the second is the rejection of the price at the point of retest. The price faithfully retested the broken trend line on the 3rd March 2011 followed by price’s rejection on the 4th March 2011. As you can see, everything has lined up nicely and no more miracles were needed before entry. One must now consider a valid stop loss and a careful trade management. Dow has fallen from 12165 from the 4th March 2011 down to 11601 on the 16th March 2011. A total gain of 564 pips within sixteen days.
Trading on or near Fibonacci retracement levels can offer excellent rewards but also unpredictable losses. It is important to know how to trade on or near Fibonacci retracement levels under excellent risks and money management rules. Trading can not be mixed with gambling and no serious trader should make a trading decisions based only on gambling expectations. It is now urgent to educate traders to trade properly near the Fibonacci retracement levels. This remains a huge task and a serious challenge to all “Fibonacci retracement” traders. “Fibonacci trading” is not Fibonacci gambling.
This article is written by Georgetrio (www.stochastic-macd.com)