The Fibonacci Trading Method
My Tramline Trading method consists of three major parts:
- Elliott Wave analysis and
- Fibonacci retracement levels.
With the addition of sentiment measures, I have a complete trading system that I use in every market and in every time scale.
Fibonacci and today
Isn’t it a little strange that an Italian living in the 12th Century can offer anything useful to today’s traders and analysts working in the highly sophisticated financial markets of today? But it’s true! I consider this to be of paramount importance in my work and use it every day.
Basically, the Fibonacci sequence of numbers describes the growth (and decay) of natural living things as they go through their life cycle – and I consider financial markets to be a part of that world. Market prices for all freely traded instruments pass through cycles of growth and decay – and on many time scales.
Most trading platforms possess the Fibonacci tool and all you have to do is find the price extremes of a particular wave you are considering. These extremes are the two anchor points and the various Fibonacci levels appear.
What do I use these levels for?
They become highly accurate price targets for reversals in many cases. They therefore offer, in advance, price levels for taking profits, or establishing new positions.
I have found the 50% and 62% retraces the most common turning points.
Here is an example of Fibonacci at work in the USD/JPY 1-hr chart
It shows a large wave down from the pink anchor point to the lower one (marked by blue line). It happened to drop to major support marked by the pink trendline and when it started to rally off it, I was able to apply the Fibonacci tool.
The rally was quite strong and pushed up to the precise Fib 62% resistance and is starting to back off from it.
But I was waiting for that target to be hit and set a limit sell order well beforehand. Upon making it to that level, my order was filled and I was short right at the peak of the rally. I entered a close stop in case it pushed up even higher so as to limit any loss.
I know some traders who only seek out these setups. They wait for a Fib 62% retrace, set their orders with contingency stops and walk away from their screens.
Here are two great examples on the weekly Gold chart
The rally wave off the first low in 2016 takes it ot a high in the $1375 area. Once that high is in, I drew the Fib levels and found the market made a major turn at the 76% level. And something similar occurred in the second wave – a decline to the Fib 76% area before turning up again.
On these occasions, the support level at the Fib 76% came into play, bit the 62% level. So how to play it in real time when we are looking at a possible turn at the 62% most-common area?
John’s Top Tip
Set your buy orders on a projected decline to the 62% level and set a close stop. If stopped out (with small loss), enter another buy oder at the 76% level using a close stop. Of course, do the opposite when in a bear trend.
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