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Sunday, October 05, 2008

NQ - 100308

Below is a 5-minute chart of the E-mini NASDAQ (NQ) from Friday. I am going to explain how I use Fibonacci now in the context of how I used Fibonacci in the past - so, if you are not familiar with my trading you need to read past posts in this blog. A good place to start is by clicking "WELCOME, LINKS TO KEY POSTS, RESOURCES" at the top of the page. On that page, I link to several "key posts" one of them being "How I Trade, and Analyzing Charts".

You will notice 5 black lines on the chart (sometimes they will be white). These represent the high and low of the move I am framing, the 50% retracement of the high and low, and the 1.382 (line above the high) and -.382 (line below the low); I refer to these last two lines as the Fibonacci extension(s). Long-time readers will notice that I stripped out the 38.2 and 61.8% retracements. I did this to simplify my charts - I wanted fewer lines. I am still aware of their presence, but I don't feel I am losing anything because the 50% retracement serves as a benchmark for that entire area which I commonly referred to (in the past) as the "Retracement Zone".

As far as plotting my Fibonacci lines, long-time readers know that I used the previous day's low/high to the opening range high/low. The opening range (OR) was [most often] defined as the high/low of the first 15-minute candle. Now when I use 5-minute charts, instead of a defined period for the OR high/low, I look for the first pivot. Many times the new method and old method match exactly; notice the pivot on the NQ chart - it is the 3rd 5-minute bar which means it would have been the high of the first 15-minute candle. But sometimes the pivot comes on the 4th, 5th, 6th (et cetera) bars...in which case, I find it more exact to use that pivot point instead of the fixed 15-minute method.

Regarding the previous day's low/high - I still use this as long as the price action does not violate the current day's opening range. On the NQ chart, the low of the previous day occurs towards the end of the session, and price never violates the current day's opening range. I will show an example later where price does violate the opening range, and how I determine what point to use in that case.

Note how the Fibonacci lines frame the day's action perfectly. Price rallies to the (upper) Fibonacci extension and abruptly reverses. It falls to the 50% retracement where it chops around (as is expected in that area), then falls to the previous day's low, bounces, and makes a sharp move to the (lower) Fibonacci extension where the decline stalls.

My trades

The first arrow points to a textbook example of offsetting bars at the OR high - the first candle is down and closes below the high, the second candle is up and closes back above the high. The entry was a break of the second (up) candle's high. Since the OR high was breached earlier in the morning, I viewed this as a pullback and my target was the upper Fibonacci extension (FE). It was hit eight bars later.

The next trade was a bit riskier - but I entered the trade with that knowledge. Price had already broken back below the 50% retracement and then pulled back above it. The entry was a break of the engulfing candle (second arrow), and my target was the lower FE. Since the bars were wide-range, I adjusted my position size accordingly. The more conservative entry would have been at the third arrow (I did not take it, as I was already in) when price broke back below the 50% retracement and pulled back to print a version of a hanging man (though not perfect, as it had an upper tail). The lower FE was hit in the last 30-minutes of the session.



Closet Daytrader said...

Thank you!

Thank you for the detail explanation!

Anonymous said...

Nice trades. So what do you think? Black Monday?

Mark said...

X, great post. Do you use Moving Averages in your analysis?

Javi said...

Thanks X for sharing your new strategy.

So do you always enter a trade on a pullback to one of the fib. lines described on your chart ?

Do you always use targets to the next fib. lines ?

Do you use trailing stop or leave your first stop until target is reached ? If you use the first how do you use it ?

I am very happy to hear from you again.



J.R. said...

Looks like your black monday call was spot on. Damn.

Trader-X said...

JR, I think you called the bottom.

Everyone else - I will answer questions in an upcoming post.

Trader-X said...

Since I am not posting until mid-week, here are some quick answers.

No, not using Moving Averages much anymore. I will elaborate in a future post.

Javi - usually a break or a pullback to a Fib line. I always use Fibs as a target. I usually leave my initial stop in place unless I have a huge/quick move in my favor, in which case I may lock in some profits...this is purely discretionary.

Javi said...

ThanX X for your quick answers.

As you said you are trading only 20% of your total trades in 15" or 30" candles (Trader X style). The remaining 80% of your trades are E-mini NASDAQ 5" candles or use the same strategy to different stocks ?

I look forward to your next post :)