|
Be sure to read our
Daily Lesson at the end
of this blog.
Current series: About Fibonacci. |
| This chart shows several different
points. First, as discussed in the chat room, several of
us took exits at the dark blue VWAP line which
also corresponded with the midpoint of the downtrend
channel. If you didn't take a partial exit here,
it would represent an excellent place to initiate a stop
loss, should that test have failed (which it did, in
this example). The second
illustration is how to use Fibonacci to measure the
amplitude of successive waves. This shows the wave from
11998 to 11935 being used as the 'seed' to generate the
next one, which reversed precisely in the 1.382~1.618
zone.
Some people use the amplitude of the
retracement wave (in this example, the one that started
at 11935 and ended when it hit the VWAP line), but I
have never found any empirical evidence that this method
works. Also, it is not intuitive. |
| Please note the shape of the VPC from
yesterday; it is actually three separate pennants. |
| Short signal approaching @ vpc, but
watch slow stochastic or confirmation. |
A
trade with the Universal
(This is also
archived on the Universal
page)
First thing you
do each morning is check your Price Histogram chart. If
you don't have one, then you can just get the numbers manually
from our web site. We post the
NTR each morning on each of our blogs (ES,
ER2,
YM,
NQ).
The Price
Histogram chart is 5 or 30-minute, day session only.
Conditions for a Trade
Now, move to
your UNI chart. Mark the
VPC lines manually in your UNI chart. One you have done so,
you don't need to look at the Price Histogram chart again.
Make sure your UNI chart is set to "All Sessions" (not day
session only).
A long trade is
signaled when prices move down to the VPC from above, as shown
here.
We have two
indicators to alert you to a long trade setup. First, the
20 band panel will turn light grey when the slow stochastic is <
20. Also, a text alert will pop up in the upper right hand
corner:
Anticipating
the trade entry
Trade entry is
always difficult. I have set up the charts specifically to make
trade entry as easy as possible. After all, isn't that what
charts are for?
Once prices have
touched or moved below the
VPC line, and assuming (1) and (2) from the above chart are
also true, you are then looking for the %K to cross above %D on
the fast stochastic. The fast stochastic is the green and pink
spread line in the stochastic window. When the color
changes from red to green, that is a cross.
- Note you can
anticipate the color change because the spread bars get shorter
as they get closer to a cross.
- Note I have
colored the price bars in the main chart window to be the exact
same color as the stochastic spread bars. So you can see the
impending color change in the main window.
- Note the color
will start to change as the bar is in the process of being
created (from one or two minutes, to a few seconds). During this
time, you may see the color flash back and forth between pink
and green. Or you may see it hold green for a while.
Entering the Trade
You are now
waiting for the green price bar to complete. Once it is
complete, you can enter the trade.
Here we have
set up two price arrows that show you the price that is one tick
above, and below, the current price bar. So as the entry bar is
about to complete, (in this example) you can look and see that
12416 is one tick above the high. So you can prepare your stop
market long order using your broker, or an bracket trader.
Note that the
initial exit target is also shown, here 12469. So if you
use a bracket trader, you can input that information as well.
As soon as the
bar "prints" and a new price bar is started, you will see a Blue
Arrow confirming the entry bar. It will also print a
price, for reviewing later.
Why do you place
a market stop order? Sometimes, prices might continue to fall.
If so, you may want to trail your stop entry price downwards
with each successive bar, to give you a more advantages entry
price.
So what do you
do when the trade moves against you? Read on.
Following our Alerts for a Trade:
If you are in
our chat room or receiving our live alerts from Yahoo Messenger,
as prices approach the VPC, you will get an alert to go to the
blog page. It shows the trade signal is approaching. Note
how you can also see the target, which is the other end of the
Keltner band.
Trade Setup
This confirms
the VPC line and number, and shows roughly what the trade should
look like after it signals. It uses a curved dotted arrow.
Signal
Confirmation
The next chart
confirms the trade entry. It uses a straight dashed arrow,
and also shows the initial Keltner exit target.
Trade Exit and "Natural Stops"
We then use a
solid arrow to confirm the trade. The charts automatically
paint a yellow highlight around the exit bar as it touches the
Keltner.
Here the trade
moved against us. You can use stops or not; that is
totally up to you. However if you do not use stops, then the
Keltner exit provides an excellent Natural Stop. It is the
same target you would exit at on a winning trade. Note how
it minimizes the loss on this trade, which went as much as 63
points against us before exiting at -22.
Warning: Trading
without stops is dangerous. You should always do your
homework first, and be aware of 'worst case' situations where
the market makes sudden moves. A "9/11 failsafe stop" is a
good idea. Another good idea is a stop based on your own
liquidity, which of course your broker will do for you if you
are not careful. That's also known as an 'electronic
margin call.'
Note "mini" POC at 12370
| Here is a good example of when to place a
break-even stop. If the trade comes to within a few click of
the exit target, then moves back, it is always a good idea to set a
b/e stop because a return all the way back to entry after a
reasonable extension, means that the trade is "over." |
Today's YM BLog Lesson
Feel free to ask questions in our
IRC chat room or in the
Enthios Forum at Yahoo Finance.
| A few words about Fibonacci
Once upon a time, in the 12th century, there was
a monk named Leonardo Fibonacci, though his friends knew him as Leonardo di
Pisa. While studying the procreation of rabbits, he noticed an elegantly simple
number sequence that explained the rate of increase in their population.
Figure 1
The sequence starts with zero and one, then ads the latest
two numbers to get the next one. So zero plus one equals one, one plus one
equal two, one plus two equal three, two plus three equal five, three plus five
equal eight, and so on.
This sequence can be used to describe an amazing variety of
basic growth patterns of nature, from the distances of the planets from the Sun
to the rings of a tree to the proportions of the human body to the branches of
the Sneezewort Plant.
Figure 2
Just why this simple sequence describes so many different
processes of nature has been the subject of debate among philosophers and
mathematicians alike for the past seven hundred years. Perhaps even more
mysterious is how the same Fibonacci sequence also pops up, with astounding
regularity, in the financial markets. Indeed there are many other sequences,
formulas and numerical tea leaves that traders use to tell them when to buy and
when to sell – you will learn some of them right here in this Handbook – but
none describe the market so universally, and none portend it so regularly, and
none translate its chaos into clear meaning so simply, and elegantly, as the
Fibonacci sequence.
If you think about it – if you really sit down and noodle
it - perhaps the leap from the ordered chaos of nature, to the chaotic order of
the financial markets, is not such a great one. After all, what is the market
but a most basic interaction between people, so primal that it precedes language
in the development of human intelligence and even today is largely independent
of language? I mean, ever been to Marrakech? Perhaps it is not a surprise that
the ebb and flow of the financial market mirrors that of nature itself. It
certainly is no coincidence that we measure price waves in the same way that a
surfer instinctively measures the swell of the ocean, and the same way that a
school of fish flows with the invisible currents underneath. And just as a
forest is made up of trees of every possible size, each unique but each also
coming from the same source, so we recognize that the market is made up of
financial fractals – geometric patterns that are repeated at ever smaller scales
to produce shapes that are unique on the one hand, but which can be defined
using the simplest of mathematical sequences.
Lastly – and perhaps most importantly – there is another
common thread connecting nature with the markets, and that is the notion of the
“seed.” Virtually all of the patterns in nature that are described by the
Fibonacci sequence, have seeds of one kind or another. There is no question
that Leonardo’s rabbits had plenty. Trees and the sneezewort plant all come
from seeds. In exactly the same way, all growth in the financial markets also
comes from seeds. It is no coincidence that in this Handbook you will
frequently come across such words as “seeds” and “fractals.” And perhaps, at
some point down the line, when you reach the trader’s equivalent of nirvana, in
a sudden flash of enlightenment you will understand that seeds and fractals are
indeed the same.
So how does it all relate?
To see how Leonardo’s mindlessly procreating rabbits can
tell us when to buy and when to sell 500 shares of Microsoft for a profit, let’s
look at the first numbers in the Fibonacci series:
1 2 3 5 8 13 21
34
55 89 144 233 377
There are an intriguing number of interrelationships
between these numbers. For instance, any given number is approximately 1.618
times the preceding number and 0.618 times the following number. (Note that
these constants do not apply to the first several numbers in the sequence;
however, the further along you move in the sequence, the closer the ratios get
to 1.618 and 0.618.)
Just as 1.618 and 0.618 describe the relationship between
one number and the next in the Fibonacci sequence, so they also describe the
relationship between one “surge” in prices and the next, in the stock market.
So if prices surge from 5 to 8, then you can multiply the 8 x 1.618, to estimate
that the next surge in prices will be to 13. Likewise if they retrace from
13 to 8, by multiplying 8 x 0.618 you can estimate that the next retracement
will be to 5.
Continuing that logic, just as the ratios between any two
successive numbers in the Fibonacci sequence are important, so are the ratios
between any three successive numbers, and any four successive
numbers:
1 2 3 5 8 13 21
34 55
89 144 233 377
1 2 3 5 8 13 21
34 55 89
144 233 377
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