EWT and Fibs

Jackozy, that post is worth the yearly subscription on its own.

Now so far i have been playing Devil`s Advocate in asking questions on fibbo`s. However when it comes to fibbo`s i like to think i am not to bad.

You boys have shown great courtesy with your patience and answers, so lets see if i can add value to your trading.

Firstly i think you should review your starting point when placing your fibbs and also you seem to start with a bearish fib on a bull forecast.

Place your 100% at the top of wave 1 pulling it back so 0% sits at the bottom of wave 1.
You have now placed a bull fib on a potential bull run.

Now 23.6 becomes the extreme pullback (i tend to start going long from 61.8 then adding at 50, 38 and 23. The thing that you should have noticed is that you have now forecasted its potential entire run without having to move your fibbs.

For your entry point you need to change from daily to 4 hour and look for consolidation, price action or outright rejection (dont trade smaller than 4 hour)

When trading daily, keep checking the 4hour, making sure you get HH and HL if going long and visa versa if short. There are other bits for me to add, but hopefully this is the start.

Once again thanks for your time. KI.

Hi KI and thanks for your kind words.

You have an interesting view if not a conventional one! I wonder whether it was borne of theory or experience?

From a mathematical point of view, drawing the Fibs your way round really only changes the 23.6% and 78.6% Fibs since the 38.2% and 61.8% are effectively inverses of each other (in that 100-61.8 = 38.2 so that it doesn't matter which way round you draw them those lines will still be in the same place just with different labels). The more extreme levels of 23.6% and 78.6% come into play less often and, inverted, are not too far apart.

For me, the point in using them in what you refer to as a bearish manner is that after a rise I am looking for a retracement so, logically, it makes sense to plot retracement Fibs. For the upside projections, you would get completely different levels for resistance using your bull Fib method since you're not projecting them from the low point formed by the retrace from the initial rise.

An example we can look at the Dow:





dl.dropbox.com/u/20815047/INDUFibs.gif

Here, your method is drawn in red Fibs plotting from the top down on what may be considered to be a wave 1 of some degree or other. The blue Fibs are Fib extensions plotted using the wave 1 low and high and projected from the wave 2 low. As you can see, they forecast quite different levels of resistance but they both have the %age levels increasing with price. In this case we can see that the 161.8% Fib target (normal wave 3 target) using the latter method appears to have been more accurate, hence my original question: does your method provide more consistent results in practice?

I'd be interested on your comments. Thanks.

Hi Jackozy.

I will try and answer your questions in order

1) The way i trade fibbo`s comes from foreign banks fx traders, i was taught how to trade the fibbo`s this way a few years back (i am still learning to this day)

2)Yes you could argue that from a mathematical point of view the 23 and the 78 are the only changes. but this is important, the 23.6 (or as some use 76.4)are big players when it comes to reversals. Look at many daily charts and you will see this time and time again.

3)It is important to have a bullish and a bearish fib on your charts in different colours, they will both come from different levels so will give you a more balanced view on any likely moves.

4) the last time i had results of my trades checked, i called 30 out of 31 correct (all trades where done live and had open, S/L and target) now the interesting thing is the S/L i called was mainly 10pts with some at 15, so as you would expect the R/R was very good.So yes the results are consistant.

To add to the above, i look for wave 3 to hit 161 wave 4 to return back to 100 and bounce and wave 5 to hit 261 (at the 261 watch for a fake move up after a daily range forms, its a bull trap). I will add to pullbacks, take 50% proffit around the 161 mark on the way up. Of course as we know it never always goes to plan, hence why i urge folk to keep an eye on the 4 hour.

Finaly, spend some time plotting your fibbs the way i have suggested (historicaly)and look at how consistant it is. All the best KI.

Forgot to say, the 2 main areas to look for in fib failures are bottom of wave 4 at the 100% and midway between 161 and 261 on wave 4-5.

KI,

Thank you very much for a very thoughtful answer. I appreciate your candour.

I think I'll run some paper trades based on your Fib technique to check it out for myself. I'm not doubting your word, but I'm sure you'd agree we should all crash test any method before putting it into practice. I'd certainly be happy to replicate your track record!

Of course, one could argue that TA only works really well if you're trading the same levels as the big money so if that's what the foreign banks are using to trade FX then it hardly matters if it's technically "correct" or not - all that matters is which levels the money flows at.

I note that using your technique, a fall back to the 100% level (which I also use) coincides with natural (and EWT) support at the wave 1 peak so I can see that that makes sense.

Re the 23/76/78 Fibs - if you're using the 76.4% and the 23.6% then there is no difference mathematically at all. I do agree, however, that in FX accuracy is more important due to the volatility and margin involved.

It's good to have discussion about new/different techniques - that's the whole point in this site and forum I guess - so thanks again for sharing your views.

Here we're going to look at a live example of this theory in action. Prices almost never perform precisely to TA theory so please view this post as educational rather than a trading tip.

USDJPY had been in a downtrend which ended at a known uptrend support with a bullish RSI divergence. We've seen an initial rise and retrace so we can see how the theory matched up:




dl.dropbox.com/u/20815047/USDJPYexample1.gif

We can see it dropped to the 78.6% Fib so we plot the Fib extensions from there to give us resistances on the way up to a wave 3 target:




dl.dropbox.com/u/20815047/USDJPYexample2.gif

We have not (so far) reached that target so the rest is theoretical. The wave 3 target from the Fib extensions comes in very close to a known, strong resistance level so it seems a good place to trade from. We can then theorise as to how the rest of the waves could look:




dl.dropbox.com/u/20815047/USDJPYexample3.gif

And then on to a possible 5th wave move:




dl.dropbox.com/u/20815047/USDJPYexample4.gif

Note again how a wave 5 equal to wave 1 target coincides with a natural, known resistance. We can even look at the subwaves of wave 3 we we appear to still be in:




dl.dropbox.com/u/20815047/USDJPYexample5.gif

We can see that so far it's performing very nicely according to theory but we should never assume that this will continue.

Good luck!

Wow, Jackozy that was about as text book as it gets so far. Great explanation of a tricky subject. I will continue to observe in anticipation of the next move