Déjà vu All Over Again

I began to follow the 10 year Treasury Notes after they formed the head of an inverse head and shoulders in early September. I missed the formation of the head, so I waited for the right neckline then right shoulder to be created. As I wrote in a previous blog post,  the right shoulder was a 38.2 retrace of the AB leg on the daily chart, coincident with an 88.7 reversal on a 610 tick chart. A perfect set up to enter the trade long as seen on the following daily chart:

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It is easy to see the pattern in hindsight. If you trade measured Fibonacci patterns, it may have been obvious while it was forming. Should this pattern complete as expected, the 10 year Treasury Notes should hit 129-130 (the pattern destination zone, 161-224 extension of the XY leg).

A word about patterns: The XY, YA, AB, and BC legs are usually obvious and clear (straight line-like). The CD leg can be, and generally is, messy (squiggly line). 

Last week on Wednesday November 20, the FOMC meeting minutes were distributed at 1pm CT. This non-news event (the minutes contained nothing materially new), caused a great deal of volatility in the markets. The ten year notes were not immune. So rather than price migrating to the daily destination zone "straight line-like" it became squiggly/messy. As can be seen on the following 1597 tick chart (arbitrarily large Fibonacci number that shows the zig of price):

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You see that price bottomed in the morning session of the following day in an area of confluence. As with the Daily "C" this confluence was both larger time frame reversals and shorter time frame reversals. Specifically, (1) 88.7 retrace across the 200MA (blue fib measurement), (2) inside the destination of a 88.7 short pattern (green fib measurement, green hashed box), and (3) fractal A =161 reversal structure (red fib measurement). Price has exceeded the bounds of the fractal A=161 destination (red hashed box) so the next area would be the B target in the 127'10-127'16 area. Expect a 38.2-61.8 retrace then reverse to complete in the 128'02-128'31 area which is close to the bottom of the daily target at 129'04.

As long as another FOMC/central bank event (such as the December 17-18 FOMC meeting) does not change market conditions, I continue to believe that 10 year notes will increase in value and 10 year rates will decrease.

Long At The Low With Proper Set Up

Today was an historical day as the Dow 30 cash index cracked 16,000 and the S&P 500 cash index cracked 1,800. A full blown market correction is just waiting for the NASDAQ composite to break 4,000 (only kidding).

In my earlier blog today, I discussed the rationale for the early long trade and marked the chart with the notation "Obvious area for day trader short". Sometimes the market acts as you expect and sometimes it doesn't. Today was a case where it behaved as expected. Since the market remains in a longer term uptrend, my plan is to buy retraces, even when "perfect" shorts set up.

I captured the entirety of today's ESZ13 (December E-mini S&P500) price action in the following 1597 (arbitrary large Fibonacci number) tick chart:

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A couple of key points regarding the market today:

• If a larger time frame fib measurement worked, then keep it on the chart as the traders who used that swing measurement may use it again. That's why the blue Fibonacci retrace remained on the chart.
• When a pattern completes into its destination zone (cross-hashed gray box), in this case from the 78.6 short, look for reversal and continuation patterns.
• Regardless of the time of day, if a pattern sets up, then trade it. 
• Although not proper swings on this 1597 tick chart (no 50MA cross, but they are proper on smaller time frames), the 161.8 inverse head and shoulders (brownish fib retraces/lines) formed a perfect pattern that aligned with the blue Fibonacci measurements at 127.2% and the destination zone of the 78.6 double top (aka confluences).
• While the "X" point of the 161.8 inverse head & shoulders aligned with the 112.8 larger time frame retrace (blue lines) and the destination zone for the 78.6 short, it was not sufficient to turn price on a dime. Not a problem, it was a valid trade entry and it failed, but it set up a better trade opportunity at a lower price.
• Think of a head & shoulders pattern like anti-lock brakes. Sometimes the speed of price movement needs the brakes pumped before a full-stop/turn can occur. 

The RTH session is closed at this moment. ETH has not yet opened. Closing values for $ADD, $TRIN, $TICK, $VOLDC, A/D Line, don't necessarily suggest a melt up during ETH. Nonetheless, the destination of the late day inverse head and shoulders is within reach.

When Many Ideas Align

The the market is in an uptrend. For a technical trader, the reason is irrelevant, the chart says it is so. As a result, my day trading plan is to buy retraces until that strategy fails two days in a row.

Trading is an art form, rather than a science, but a rigorous plan is essential to find high probability trade ideas. There are as many trading plans/styles as there are traders. While I rely on Fibonacci structures, I am cognizant of several other trading methodologies and attempt to understand where/how those traders might participate in the market. The following chart is the E-mini SP500 December futures contract on a 987 tick time frame and shows that today was a great day to have that awareness of other trading styles. Find the label "LONG HERE" as I will discuss why this was a high probability long trade entry:

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"LONG HERE" represents the confluence of six different trading ideas.

1. Today's high measured as a 161.8A (head and shoulders pattern, green fib retracement tool). When the 161.8A is achieved, we expect B to be a 78.6, 100, 112.8 retrace of YA (black fib retracement tool). Since my plan is to buy retraces, I did not consider the short at the high. But the 78.6 retrace of YA could be a B or an A. In either case, this suggested a turn up in price.
2. While I don't trade 200 A patterns, the red fib measurement shows the top as a 200 fractal A (fractal, because on this time frame the XY leg did not cross the 50MA). As with most patterns, the destination is the 161-224 extension of the XY leg (X fr, Y fr in this case) and represented by the purple hashed box. When patterns complete, price either consolidates, continues, or reverses. Nothing earth-shattering here, other than the awareness that a reversal could occur and chart out the destination of all patterns.
3. As mentioned the market is in an uptrend, there are traders who sell to or buy at "gap fills." A gap is the price space created by traders during ETH (extended trading hours). The Previous Day Close is the purple dashed horizontal line. The Previous Day High is the red dashed horizontal line. Some traders consider gaps to range (red line) or gaps to close (purple line). The price vibration at yesterday's high suggested that short-term visual traders in were control and that gap on close may be their next short target, or the location that others may step in to turn price up.
4. Some traders use pivot points based on RTH (regular trading hours range) range. The Pivot Point calculation is based on the previous day: (High+Low+Close)/3 and is represented by the pink horizontal line. Pivot points (PP) may be considered support or resistance so the inability to break the PP would influence those traders to initiate a long.
5. Some traders use market profile. Yesterday's Value Area high is represented by the green dashed horizontal line. The inability to break into yesterday's value area would be considered strength, so traders who lean on market profile might have initiated a long trade.
6. Finally, larger time frame Fibonacci style traders may have measured yesterday's RTH low to today's RTH swing and considered the 61.8% retrace (light blue Fibonacci tool) a sufficient momentum retrace to initiate a long position.

Six reasons. You could ask for more, but you will not get many trades if you do.

That said, notice that price stopped at the 78.6 retrace of the recent swing (dark gray Fibonacci tool). This is a typical location for day time frame traders to change the direction of price. 

If the market closes without making a higher high then I might consider shorts tomorrow.

Trade what you see, but keep in mind what others see too.

Eating The Dog Food

When I read a recommendation about a stock or a product from a so-called expert, I am usually a skeptic. Does the individual believe what was said/written? Does the individual really intend to do what was said/written? If you remember back to my "US 10 Year Notes, What's Next?" blog post, I summarized the situation as follows:

"If I had to bet, I would bet that 10 year note prices will continue to increase, rates will decrease, for the foreseeable future."

The question remains; did I eat my own dog food? Did I take my recommendation/opinion and act upon it? Yes. Returning back to the original 10 year notes post, you will see that price had not retraced into a "C zone" (the turquoise boxes in the second chart of that post which is a 38.2-61.8% retrace of the AB leg).  As I was not sure whether the inverse head and shoulders pattern on the daily chart had put in the B point (a.k.a. right neckline). My only trade option was to wait for the right shoulder/C zone to be hit. And that's what I did.

Looking at the following weekly chart, you will see that price did retrace into the C zone, this week.

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I don't trade directly from weekly/daily charts, but they serve to find the trade locations of interest. The next step is to watch price on a trading time frame chart and wait for a reversal entry that would initiate the long trade. A trade that may move price into the destination area of this pattern which is the 161.8-224% extension of the XY leg to 129'04.5 - 130'31.0.

The following chart is the December 10 year note on a 610 tick time frame, with the 8, 50, and 200MA, as well as a volume histogram below price.
 

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The 38.2% retrace that would set the minimum potential right shoulder was 125'26.5 and is drawn on this chart. The swing low was put in yesterday, during extended trading hours and represents point X, during the early morning a swing hi (across 50 & 200MA) was set, then price retraced 88.7% of that swing. Perfect. Here is a reversal pattern, that would take the trade into the direction of the CD leg (long). While the elapsed time to create the XY leg was about 4.5 hours, the retrace took only 2 hours (much faster than XY), and the swing low that created the A point corresponded with a volume spike. Moving averages were in proper location, so a high probability trade set up was available.

The following Tradestation positions window, shows I am long 3 contracts at an average price of 125.83 (125'26.5).

My trade intention is to hold two contracts to the 129 area (minimum target for the pattern). CD legs are generally sloppy, but I have no desire to turn this trade into a loser. My stop is currently break even and will be adjusted upwards with price. Tomorrow, Federal Reserve Chairperson-Designate Janet Yellen testifies on monetary policy before the Senate Banking Committee in Washington DC. This may generate some chaos in Treasury prices. Should ten year notes continue to increase in price, they may not get to the target price before the contract expires. If it does not then I will close this position during the rollover period.

As always, trade what you see.

Same Pattern, Two Different Markets

Today is Veteran's Day, a bank holiday, although the equity and futures market are open, I expected a slow, low volume day. Fortunately, a few minutes after market open, the Dow (YM) and S&P500 (ES) futures exhibited typical coincidental behavior that has become a high probability/large size trade in my trade plan.

Key characteristics of this trade:
1. Both YM and ES have price swings across the 50MA at similar time for their X and Y points,
2. Both YM and ES form an "A" point that measures as a double bottom or double top (78,6, 88.7, 112.8); the measurements between the markets do not need to be the same, merely the category,
3. 50 and 200MA must be positioned such that movement off the A point, toward the B target, will cross the 50MA first, then the 200MA.

The following chart is December YM on 89 tick. This is a smaller tick frame than I usually use, but selected it since I expected a lower than normal volume day.

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The following chart is December ES on 377 tick. Also a smaller tick frame than I usually use.

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Two different markets, exhibiting the same patterns at the same time. Watch for these coincidences to occur and track the frequency in which the market movements are aligned. This might become one of your primary set ups too.

Fibonacci Music - Catching The Dow's Bottom

The markets are crazy. These last few days were no exception. Yesterday, at the open, the Dow hit an all time high and then plummeted to end the day with one of the largest daily losses of the calendar year.

Before the traditional market open at 8:30a Central Time (the futures markets are open "24" hours per day), there were several economics reports that had "market moving" potential. 

October Jobs Report, Unemployment Rate, September Personal Income, and September Consumer Spending were released at 7:30 a.m. CT. As is always the case before such events, bid/ask spreads increased as traders were not interested in "getting in front" of the news and the investment bank's algorithmic/high frequency trading. Once the news hit, the algos did their thing and created a buying opportunity three and 18 minutes later.

The best opportunities to buy and sell are always "extremes". Was it possible to select where the market would turn this morning? If you believe that Fibonacci patterns are predictive then the answer was "Yes!"

The following chart of the December Dow futures, 60 minute candles, shows that the news release created a bit of chaos. The news candle (sitting on right, lower yellow oval) is large, with long wicks, generally a sign of confusion. If you trade with Fibonacci ratios/patterns, you may have been prepared for this opportunity. 88.7% is a standard Fibonacci ratio for a "double bottom/double top" (click here for details). 

There are three yellow ovals on the chart. The lower left is the November 5, 2013 low at 15456, the center high is November 7 high at 15779 and the lower right is today's low at 15495.

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From the low to the high, the market moved up 323 points in two days. From yesterday's high to today's low, the market moved down 284 points in a bit over 24 hours. To determine the "retrace ratio" divide the down move (284) by the up move (323) and you see the achieved ratio was 87.9% (284/323). If the down move was a perfect 88.7% retrace then it would have been 287 points to 15492 (no need to do the math as the purple Fibonacci retrace tool shows the answer well ahead of time). Net, the market "missed" perfection by 3 points. That's good enough for me! And apparently, that was good enough for many, as you can see, as of this screen capture, the market has recovered 50% of the down move (green lines), and did so very quickly which is unusual since price generally falls three times faster than it moves up (more about that at a later post).

It is very difficult to intraday trade (a.k.a. daytrade) using a 60 minute chart. The following chart is the same Dow futures, same calendar time frame, but each candle represents 233 ticks (there is nothing sacred about 233 except that it is a Fibonacci number). Changing the chart to ticks shows the noise within the market. If you are tuned into the noise, you might hear some fine Fibonacci music. The yellow box of the following chart IS the music.

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"Unscrunching" the yellow box, exposes the following picture, a true Fibonacci symphony! 

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Looking for price swings across the 50MA (magenta line) finds the XY using the green Fibonacci retracement tool. Notice the location of the 161.8% retracement of XY. It too, is very, very close to defining the market low which occurred at 7:33a CT, only three minutes after the news "chaos" (generally if news will move a market, the market will still be moving in that same direction, five+ minutes later). A 161.8 measurement signifies the potential of a head and shoulders reversal pattern. On this small time frame (233 ticks) we found a reversal pattern that aligned with the larger time frame double bottom reversal measurement (88.7%). If low this is a valid "A" then when price reverses to go to swing point "B" it must: (1) pass through the 50MA before the 200MA, and (2) the potential "B" points (78.6%, 100%, 112.8% retrace of YA) must be higher than the 200MA. Both requirements were met, resulting in a low risk trade entry. As you can see, the "B" swing point was set in the 78.6-100% YA retrace area (represented by black lines and could achieve 112.8% retrace of YA or more), B points do not need to be exact. Then price retraced to a 61.8% C (we expect 38.2-61.8% defined by the red lines) retracement. Further solidifying this pattern is the requirement that the C point (some may call this the right shoulder) is not lower than the X point (or left shoulder). This pattern met all requirements and did move price into the expected destination area, as defined by a 161.8-224% extension of the XY swing, represented by the purple line.

Perhaps you are still not convinced because you can't "hear" the music, there is still to much noise. Let's zoom into the day's low, by looking at a 55 tick chart. The yellow box remains, but now we are looking solely for further proof of "the bottom." Even on a 55 tick chart the pattern and trade entry rules remain the same. There is a saying that price is fractal. Which means that whatever rules you have, shrinking or enlarging the time frame should have no impact.

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After yesterday's strong drop and the chaos following the news announcement, maybe you were still not convinced that this bottom was "THE" bottom to buy. Drop down to a lower time frame to find further confirmation. Fifteen minutes after the low was set, a 78.6% double bottom reversal structure was put int. Same rules, same thoughts. If this low retest is a valid "A" then when price reverses to go to "B" it must: (1) pass through the 50MA before the 200MA, and (2) the potential "B" points (112.8% & 127.2% retrace of YA) must be higher than the 200MA. Both requirements were met, so another low risk trade WAS possible when price closed above the 8 MA. Another "odds enhancer" was the fact that the market was oversold by 40 or more points at this time. While the regular cash market was not yet open, pre-market trading was occurring. A quick calculation of the net change of the Dow 30 components showed that the cash market was indeed higher than the futures market. So either cash had to be bid down, or the futures must move up.

Eighteen minutes after the 7:30a news release, provided another low risk entry. Risking 20 or less points, could have returned 130 or more points depending upon how you manage your trade.

US 10 Year Notes, What's Next?

This morning, the ECB unexpectedly cut rates for both the main refi rate and the marginal lending facility by 25 bps, to 0.25% and 0.75% respectively. The Euro tumbled against the dollar and the European stock market rocketed up. Could this be the next stage in the currency war? Could any of these actions have been predicted by the price action of the 10 year note futures?

The following chart is the US 10 year notes futures contract, weekly time frame with a Schiff fork drawn using key swing points defined by the weeks of 4/9/2010, 11/5/2010, 3/4/2011. As you can see, the fork, with additional parallel lines (+120, -20) caught both the all-time high and the recent year low. Without going into depth on the median line methodology, suffice to say that the overshoot predicted the undershoot. And, that price is expected to rise (rates move inversely with price) to the center median line.

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Can we use Fibonacci patterns to validate the hypothesis that notes will increase in price and decrease in rates? Of course! Zooming into the recent swing low of this same futures contract, by looking at the 240 minute chart, we notice that the low in early September was a "perfect" 161.8 inverse head and shoulders pattern. When two different methodologies align, odds improve. The key swing points of the pattern are represented by yellow ovals. The destination price range for the pattern is represented by the yellow box and is based on the XY swing that produced the pattern "head." It is not "obvious" whether the BC leg has been put in yet. The turquoise hatch area represents the prices that we would expect to see if it had. Perhaps, "someone" knew the ECB plan and chose to continue buying the 10 year notes... 

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Returning to the weekly chart, but retaining the inverse head & shoulders pattern destination price box we see that a completion of the pattern is not "out of the question" based on the location of the center median line.

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If I had to bet, I would bet that 10 year note prices will continue to increase, rates will decrease, for the foreseeable future. If you don't have access to futures charts, then take a look at the iShares 7-10 Year Treasury Bond ETF, symbol IEF.

Window, The Definitive Calculation

In case there remain questions about the "exact" definition of a "window," take a look at the following pseudo-EasyLanguage* algorithm to calculate Window:

// Calculate 50 period simple moving average 
// based on candle close
50MA = Average(Close, 50);

// if the entirety of the candle is 
// above the moving average
if ( (High > 50MA) AND (Low > 50MA) ) then
  Window = Absolute( Low - 50MA );
else
   // if the entirety of the candle is 
   // below the moving average
   if (  ( High < 50MA ) AND (Low < 50MA) ) then

     Window = Absolute( High - 50MA );

   else Window = 0;  // Candle straddles MA, no window

// Display the window size

Plot1( Window, "Window" );

Over time, you will develop a feeling for the proper window size. When you see these windows, you can then draw the swings on your chart. These swings serve as the basis to measure Fibonacci retracements and extensions.

The following list gives you an idea of the window size that I use, by product, by trading time frame:

• YM 233 tick: 3.9 point window
• YM 144 or 89 tick: 2.1 point window
• ES 987 tick: 1 point (4 ticks) window
• CL 233 tick: 0.06 (6 cents) window

This list is merely a starting point. To be a successful trader, you must find what works for you.

* EasyLanguage is the Tradestation programming language - I am not affiliated with Tradestation, but I do use their platform 

Tactical Long in Weak Market

Show a 3rd grader this 240 minute chart of December crude oil and ask him/her if price is going up, down, or sideways, and I'll bet you will get the answer "down." It's not hard to see that crude has been falling since last August. In fact, it is down over 14% during the last 68 days. The best trades are in the direction of the dominant trend, but what to do if you're not in the short trade?

Wait for a perfect setup that meets your rules. Today, a 78.6% "Double Bottom" Fibonacci pattern had the perfect setup. Perfect enough, to force a long trade in this short market. Specifically, the setup was as follows:

A swing low was created around 6:30a (labeled X), price fell hard to that price, consolidated sideways, and then attempted to recover (labeled Y). The movement from X to Y was $0.50 and took 1 hour, 40 minutes. 

• This XY leg qualified as a valid swing since there was an acceptable window at both endpoints.

Price then fell fast and hard to the 78.6% retrace of XY, but did not go below. The drop of $0.39 took less than four minutes. At this moment, I waited for price to close above the eight SMA (purple line) and placed a "buy market" order. The initial target was 36 points with a risk of 9 points (better than 3:1 hurdle).

• The YA qualified because it stopped exactly at a Fibonacci ratio. It was fast and exact. Point B, the 113+ retrace of YA was above the 200 SMA (brown line), at the moment that point A was set.

A "perfect" 78.6% Double Bottom has an initial target at 113-127.2 retrace of the YA leg. It is then expected to retrace 38.2-61.8 percent to make the C point. The probability of the C point succeeding is increased if, when the B point is set, the 38.2 retrace back to A is greater than the 50 SMA (in the case of a long). That condition was met today. Therefore, there was no reason to exit the trade completely.

The expected destination of a 78.6 Double Bottom is the range defined by the 161.8 - 224 extension of the XY swing. You can see that this area overlapped the 78.6-88.7 retrace from the previous day's afternoon high. A good place for shorts to push price down, into the longer term trend.

A perfect long setup, that culminated in a handoff back to the shorts, with risk reward ratios of better than 3 to 1 and 6 to 1. Not bad for a counter-trend trade.

Fibonacci Patterns on Large Time Frame December Wheat

The focus of this post is the December 2013 Wheat contract, 120 minute bars, roughly four months of price is contained in the chart (brown line for 200MA, magenta line for 50MA, no 8MA since this timeframe is too large to trade, but perfect for scout set ups).

Click to enlarge

Notice that the high price set in mid October was defined by the preceding XY swing across the 50MA. The high measured to a 161.8 retrace of the XY leg which is a "Head & Shoulders" measurement. The B and C swings are labeled. Price is now in the area that the H&S pattern was expected to achieve (161.8-224 extension of XY leg).

On the movement down, I highlighted several "obvious" areas where Fibonacci traders stepped in, either to end their short, or to attempt to turn price up. Specifically at the 50% retrace at 673 3/8 and the 61.8% retrace at 664 3/8. When price behaves this way at these "exact" prices, it is sufficient for me to believe that Fibonacci ratios are used by Wheat traders too.

This chart further interests me because the 224 extension of XY aligns perfectly with the 78.6% retrace of the full pull at 651 6/8. Confluences such as these always make me wonder ...

Should this confluence be sufficient to turn price, the last trade of this contract must be kept in mind as it is the last trade is the business day prior to the 15th of December, so there is not much time left. Traders will roll to a later contract, the March WH14 or later, so look for potential continuation there.

Trading Day Time Frame E-mini S&P Futures In A Consolidating Market

During the past eight trading days, the e-mini S&P futures (ESZ13) has traded in a narrow band. This is a market in consolidation that is "controlled" by day time frame traders ("daytraders"). That said, using Fibonacci patterns and retracements can provide low risk, high probability entries and targets.

One such trade set up this morning after the release of the ISM Non-Manufacturing PMI at 10a ET, 9a CT. It is common for news reaction to provide an opportunity for a trade.

Looking at the chart below of ESZ13, 2584 tick (arbitrarily large Fibonacci number to smooth out natural price noise), North American traders awoke to a 112.8 double top (DTA) pattern well under way. The DTA was set up during the 11/3 RTH session. As with all successful patterns, price should have entered the 161.8-224 extension of the XY leg, and it did. Those ETH (extended trading hours, 4:30p - 9:30a ET) traders who shorted the DTA could have been rewarded with a 4:1 trade.

As of this writing, there was a triple confluence that set up the RTH (regular trading hours, 9:30a-4:15p ET) low as a low risk, high reward trade:
1. Price entered into the destination zone of the DTA,
2. Price hit a 224 extension of a fractal swing (green lines/label),
3. Price hit a 78.6 full pull (across 200 SMA) retrace to the RTH low set two trading days ago (red lines).

In addition to these confluences:
1. Price would pass the 50MA (magenta) before the 200MA (golden brown),
2. The minimum expected retrace of the 78.6 DBA is 113 retrace of YA and that price is greater than the 200MA.

Confluence plus moving average alignment signifies a good trade opportunity.

You will also notice that at the time of this writing, the fractal 224V long, hit its destination. Next area where price may turn down is the 78,6-88.7% retrace - day traders would be expected to attempt shorts here. Finally, notice that the "B" point for the DBA long is around 1766; well within the eight day balance. If price does complete the AB leg then a 2 point risk would return about 14 points, or a 7:1 risk:return ratio.

It takes time to see and then trust the Fibonacci patterns. But, IMHO, it is well worth it.

Price Swings

Now that you know the Fibonacci ratios that I use, we need to discuss the methodology of finding price swings on a chart. A price swing nothing more than a set of low - high - low or high - low - high prices. The following is a chart of the e-mini Dow futures. You can see that there is a lot of "vibration" in price.

To simplify the process of finding the "best" swings, I add a moving average to the chart. Specifically, a 50 period simple moving average (SMA). On my charts, this moving average is always Magenta (pinkish), as follows: 

Next, I look for areas where price has created a meaningful "window" (white space) between the candle and the 50MA. Every trader will determine the appropriate window size for the product(s) and timeframe(s) that they trade. The following picture, highlights in yellow, the windows that correspond with the price swings (extremes) that might prove significant in determining the direction of price:

While it might look messy, measuring each of these extremes with a Fibonacci retracement tool creates a chart that looks as follows:

Fibonacci Ratios

In the beginning, every trader takes a journey to find a trading plan that works for his/her personality. For me, Fibonacci patterns fit nicely. Everyone is different; the way I trade Fibonacci patterns is not necessarily the same as any other trader who says that they trade Fibonacci.

There are plenty of web references that explain the Fibonacci sequence derivation so I will not do that here. What I will do is explain the ratios that I use. Let's use a portion of the sequence, specifically the numbers: 89, 144, 233, 377, 610, 987, 1597, and 2584. Note, any eight consecutive numbers in the Fibonacci sequence will generate the same ratios.

Using 610 as the numerator, and each of these numbers as the denominator, these divisions generate the pure Fibonacci ratios of:

• 23.6% (610/2584),
• 38.2% (610/1597), 
• 61.8% (610/987), 
• 100% (610/610), 
• 161.8% (610/377), 
• 261.8% (610/233), 
• 423.6% (610/144), 
• 685.4% (610/89).

Next take 61.8% and 161.8% find the square root of them and the square root of those which generates derived Fibonacci ratios of:

• 78.6%, 
• 88.7%, 
• 127.2%, 
• 112.8%.

I also use 141.4% and 70.7% which are derived from the square root of two and its reciprocal.