Previous
Lessons (Read these first!)
3/10 Building Blocks of Trading: MSL
and MSH
3/13 Building Blocks: 1-2-3
Reversals
3/24 Measuring Fibonacci : Fischer vs. Miner
Disclaimer:
This does not purport to represent the
teachings of Robert Fischer or Robert Miner. To learn more about
Fischer, buy his book "Fibonacci Applications and Strategies for Traders," on
Wiley. To learn more about Miner, check out his web site http://www.dynamictraders.com/ .
To learn more about the application of these
and other Fibonacci methods, read our new book, New
Frontiers in Fibonacci Trading.
There are many ways to use Fibonacci to estimate wave
targets. Some of them are listed in my Fibonacci Primer. However to
calculate the target of Wave 3 based upon the amplitude of Wave 1, there are two
very different ways of applying Fibonacci. Fischer uses one, and
Miner uses another. I use both, and like to see where the Fischer and
Miner methods coincide. In both cases, the Fibonacci calculations are
based upon the amplitude of Wave 1, represented in the drawing below as line AB.
The difference though is in where those calculations are then applied.
Fischer applies them to point A (the beginning of Wave 1), whereas Miner applies
them to point C, the end of Wave 2 / beginning of Wave 3. The first
example shows how Fischer applies Fibonacci.
Fischer: Calculations on Wave 1 (AB) are
then applied to point A to determine the Fibonacci target for potential Wave 3
(CD)
Fischer takes the length AB, multiplies it by 1.382 or
1.618, and ADDS that to point A to get the target for D.
- Note that the exact same targets can be achieved by
taking the length AB, multiplying it by 0.382 or 0.618, and adding it to
point B.
For example, if A is 500 and B is 600, and if we are using the Fibonacci
ratio of 1.618, then the target for D (potential Wave 3) is either:
((600-500) * 1.618) + 500
= 661.8 OR
((600-500) * 0.618) + 600 =
661.8
- Note that it makes NO DIFFERENCE what point C (Wave
2) is.
Now let's look at how Miner applies the Fibonacci
sequence:
Miner: Calculations on Wave (AB) are then
applied to point C to determine the Fibonacci target for potential Wave 3
(CD):
Miner takes the length AB (just as does Fischer), then
multiplies it by (typically) 1.0, 1.27 and 1.618, and adds that to point C,
which is the end of Wave 2 and the beginning of potential Wave 3.
Examples:
Taking the first chart, if B is 600 and A is 500, and
if C has retraced 50% of that range to 550, and assuming we are using the
Fibonacci ratio of 1.27, we would calculate as follows:
((600-500 * 1.27) + 550
= 677
- With Miner, it makes a very big difference what
point C (Wave 2) is.
- Note, however, how close the Miner 1.27 calculation
is to the Fischer 1.618 calculation. This is often the case.
When this is the case, i.e. when two different methods converge to create a
close target zone, it strengthens the predictability of that zone as a Wave
3 exhaustion zone.
- Miner also uses 100% of Wave 1 (AB), applied to
point C, as an important predicator for Wave 3. Simply put, the
measured move of AB is often the same as the potential measured move CD.
It is very interesting how often the Miner "Measured Move" comes close to
Fischer's Fibonacci target of 1.382:
Fischer: ((600 -500) *1.382) + 500 = 638.2
Miner: ((600-500) * 1.0) + 550 = 650
This actual chart from 7/22 shows the difference
between Fischer and Miner, and also how they often line up quite well:
- Turning points are labeled the same as the previous two examples, i.e
AB = Wave1
BC = Wave2
CD = Wave3
- The Fischer calculations of 1.382 and 1.618, shown in magenta, are based on AB and applied to A.
- Note that the Fischer calculations of 2.236 and 2.618 - also based on AB
and applied to A - provide a good target for the Wave5 extension (EF).
- Miner calculations of 1.0 and 1.272, shown in
lime green, are based on AB and applied to C. Note how they
overlap with the Fischer calculations.
- Wave2 (BC) retraced to 61.8% of Wave1 (AB).
In summary:
- Great minds to not think alike, but there are more
then two ways to skin a cat.
- Mix Fibonacci trading methods, not metaphors.
- There are many other ways to use Fibonacci to
target exhaustion points. Major retracements are perhaps the most
dependable.
Happy trading!
3/13 Building Blocks of Trading:
1-2-3 Reversals
The next important building block is
made up of MSL’s and MSH’s. Just
as a MSL is the first sign of a potential reversal in prices, the combination of
a MSL, a MSH, then a MSL that is higher than the first one, is a confirmation
pattern that a down trend has reversed into an up trend.
This is illustrated in Figure 4.
Figure
4: Upside 1-2-3 Reversal
Note that the MSL trigger on the
higher MSL is the first point of entry for a reversal trade, however the
reversal is not confirmed until prices move above the high of the previous MSH.
The difference between a MSH and a Swing High
Some of my trading friend have pointed
out that a MSH is exactly the same as a Swing High. That probably is the
case. Certainly every swing high is made up of a MSH at its apex. However
there are some instances where a MSH is not a swing high.
3/10 Building Blocks of
Trading: MSL and MSH
Everything in nature is made up of
building blocks. Just as the
universe is made up of atoms, so the market is made up of basic units called Market
Structures. And just as there
are two basic part to an atoms – protons and electrons – so in the market
there are two types of structures, Market Structure High and Market Structure
Low. Most price movement in the market can be defined in terms of
MSL’s and MSH’s, and the ranges that are found in-between them.
Likewise, everything you find at enthios.com is, for the most
part, defined in terms of MSL’s, MSH’s, and the building block that they form together, 1-2-3
Reversals.
Market Structure Low (MSL)
A Market Structure Low (MSL) is the
first sign of a potential reversal in prices from a downtrend to an up trend.
It is usually made up of three price bars (or candles): A low, a lower
low, and then a higher low. The
“Low” is measured from the actual low of the candle, not the closing price.
Ideally, as shown in Figure1, the Low and Lower Low will both be
“down” bars (where the closing price is lower than the open price), whereas
the third bar, the Higher Low, will be an up bar.
Figure
1 - MSL
The MSL is actually triggered
when prices subsequently move above the high of the third candle, as shown by
the dotted line. Of course, it is
dangerous to enter a long trade simply on the trigger of a MSL.
But this book is filled with ample opportunities to use the MSL and MSH
as triggers for different trades.
A
MSL can also be made up of two bars or candles when they both have the same low.
This is known as a double bottom, as shown in Figure
2. Again, ideally the
first bar of the double bottom will be a down bar, and the second will be an up
bar. In this example, the
second is a doji (open and close were the same), which is neutral.
Figure
2: Double Bottom MSL
Market Structure High (MSH)
The opposite of a MSL is a Market
Structure High (MSH). It is
the first sign of a potential reversal in prices.
A MSH is usually made up of three price bars (or candles): A high, a
higher high, and then a lower high. The
“High” is measured from the actual high of the bar, not the closing price.
Again, the MSH is triggered short when
prices move below the low of the third bar in the MSH pattern.
Figure
3: MSH
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