This Fib Can Tell the Truth!

I love Thursdays in our Professional Trader class. That is the day we discuss Fibonacci numbers and how to use them. It still amazes me when I realize how well these Fibonacci numbers work. You can use them to measure price retracements and projections for new impulses. These levels will give you possible support and resistance levels at which traders can enter trades and/or take profits. The first part of using the Fibs as they are known is to identify the cycle or impulse in the stock, Forex pair, E-Mini or whatever you are trading. The cycle or impulse is the predominant direction and thrust of the security. We commonly call it the trend. In our classes we also teach how to identify the impulsive and corrective environments and what they mean to us as traders.

Today, I am going to discuss a Fibonacci technique I use to anticipate changes in the trend. This is not as accurate as Fibonacci retracements or projections but can be used to warn of possible reversals in the current trend. This is called the Fibonacci time projection. There are three ratios we will use for this projection: 0.618, 1.0, and 1.618. This projection should foretell of a change in the trend although it will not tell the exact direction of the change. Whatever direction you are in at the time should reverse when you reach the time projection. Let's look at an example from a daily chart of the S & P 500. We had a major high on the 11th of October and then a swing low on the 26th of November. By counting the number of days between the highs and lows including the high and low day, we arrive at our cycle to use for the projections.

 

As we see, either on the date we reach the projection or within a day or two, we have a reversal of whatever short term trend we are in. This may assist you in deciding whether to hang on to a position or to take profits. This can also work on intraday charts as well.

 

Here we see projections on an intraday chart of RIMM. By using the low and high of the morning, we were warned of possible changes in trends. This technique is not perfect. We will not always see changes at all of the projected points but it works well enough to alert you as to when the market may shift. This can mean the difference between taking a nice profit on a trade or giving it back to the market.