The King's Trader Education

The Trading Plan
The Simpleton's Fibonacci
Fibonacci 101
Fibonacci 102
Fibonacci 103
Practiical Candlestick - Basic Patterns
Steve Nison - Interview with Father of Candlesticks
Steve Nison - Favorite Candlestick Signal
Practical Candlestick - Seedwaves
Practical Candlestick - OBV
Practical Candlestick - Harami
Pivot Points
Basics of Bollinger Bands
Distribution/Accumulation Zones
Donchian Channels
Elliott Waves
Market Structures
Multiple Moving Averages - "The Rope"
Three Price Break
Elements of Gann Angles
Gann Percentage Pivots
Gann on 1929
Options - Basics
Options - Indexes and ETFs
Options - Greek
Options - Covered Calls
Options - Spreads
Options - Straddle
Options - Strangle
Options - Calendar Spreads & Options Repair Strategy
Sector Trading
Swing Trading
Position Trading
TICK & TRIN Tutorial
TICK & TRIN - Sustained Reversal

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The Simpleton's Fibonacci

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Fibonacci finds its way all through nature, human nature, price movements, time movements, cycle rotations and elsewhere.

In the first few issues of this magazine, you were given a very in depth discussion and a thorough Fibonacci primer by Enthios. Those articles are rich in information and should be kept in every trader’s notebook.

I continue to receive email and private requests for help in understanding the intricacies of Fibonacci trading. In this workshop, I want to blow the intricate and finer details of Fibonacci completely out of the water. The reason being that all you traders who come to me and say that the concept of Fibonacci is fine, but that memorizing it is another matter. The most common question I get on this subject is, “Tell me King, how do I trade by this?”

And that is a fair and practical question. It is one thing to grasp a technique conceptually, but more and more, I am finding that traders want a simple and functional way to put the ideas into immediate use. So with that in mind, this column will illustrate the absolute basics you can immediately trade by. The Fibonacci purists amongst you will probably pummel me with the microscopic details I leave out. The real traders amongst you should be able to walk away with some very simple trading strategies you can implement right here, right now. In the following discussion on Fibonacci ranges, the content is timeless and therefore current. The examples cited are from summer of 2001. Don’t be confused by the data and prices. It is the rules that are important. Here we go…

I’ve shown now in the earlier articles the basics of Market Structures, acting on the Market Structure Triggers, as well as, Market Structure Failures. And I’ve demonstrated the basics of trend confirmation using Three Price Break.

The magic of Fibonacci has been explored with Enthios, and now it’s time to take these methods and forge them in to a really useful trading tool.

Market Structures, Three Price Break and Fibonacci all find synergy when I apply them to the idea of “Trading Range.”

Trading Range is simply the area that lies between two significant Market Structures. It’s the area between the current top and the current bottom. The high of a Market Structure High minus the low of a Market Structure Low equals: Trading Range.

How I make use of that “range,” falls right back to basic and pure Fibonacci.

I remind you again now- I claim no authorship to these concepts. When I speak of Trading Ranges, these are nothing more then Fibonacci retracement and growth ratios.

The above example is a Daily Basis chart of JNPR from the spring of 2001.

1. A Market Structure Low forms on April 5th

2. A Market Structure High forms on April 23rd

3. The high of the MSH – the low of the MSL = Trading Range

There is a MSL on April 5th the low of which was 28.60. A MSH formed several weeks later On April 23rd, the high of which is 69.50.

“Trading Range” is simply the area that exists between two important Market Structures. So, in this example MSH (69.50) minus MSL (28.60) = Trading Range (40.90).

Now that I know the Trading Range for JNPR, what I need is a means for putting this information to immediate practical use.

In the Fibonacci primer, Enthios showed us that price movements take place over five waves, followed by a three smaller wave extension (labeled as a,b,c), the extensions moving in a counter direction to the dominant trend.

When I talk about the four primary trading ranges that I am concerned with, I’m referring to primary Ranges 1 through Range 5, and where they occur within the trading range itself. For my style of trading, this is what I like to concentrate on.

Back to that Daily basis chart of JNPR, I want to think about how the trading range of $40.90 might help me find support and resistance areas:

By using basic Fibonacci retracement and growth ratios now and using what is my known trading range of 40.90, I can expect to find the support by plotting each wave using the high of MSH like this:

• Range 1 (-38.2%) support is 53.88
• Range 2 (-61.8%) support is 44.22
• Previous MSL SUPPORT (-100%) support is 28.60
• Range 3 (-138.2%) support is 12.98
• Range 4 (-161.8%) support is 3.32 (don’t laugh – look at what became of CMGI)
• Range 5 (-261.8%) support will not occur of course in this case, because JNPR would be de-listed and probably bankrupt by then.

My “support” areas are going to be the expected downdrafts or short targets.

By using basic Fibonacci ratios of what is my known trading range of 40.90, I can expect to find the resistance pivots by plotting each wave using the low of MSL like this:

The resistance pivots are going to occur now, in Fibonacci growth ranges now beginning from the MSL – in this case 28.60:

• Range 1 (38.2%) resistance is 44.22
• Range 2 (61.8%) resistance is 53.88
• Previous High (100%) resistance is 69.50
• Range 3 (138.2%) resistance is 85.12
• Range 4 (161.8%) resistance is 94.77
• Range 5 (261.8%) resistance is 135.67

My “resistance” areas are going to be expected updrafts or long targets.

The resistance pivots are going to occur along the five possible range pivots UP from the MSL. Support pivots are going to occur along the five possible range pivots DOWN from the MSH.

Support and resistance also always occur at previous MSL and previous MSH areas. That is because they would not be a previous Market Structure unless price movement had already stopped there.

I now know if JNPR is currently trading in an up range, where along the trend I can expect it to stall, and maybe even reverse. I also have an exit strategy before I have entered the trade.

Likewise, if JNPR is currently trading in a down range, where along the trend I can expect a bounce if not a complete reversal. This also gives me the exit strategy if I am trading short.

This is a working understanding of “Trading Range”. Let’s explore the idea in greater depth.

Trading The Four Principal Types Of Trading Ranges

• Post/ Pre Market Trading Range (PTR)
• Immediate Trading Range (ITR)
• Greater Trading Range (GTR)
• Dominant Trading Range (DTR)

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"It takes a man a long time to learn all the lessons of all of his mistakes. They say there are two sides to everything. But there is only one side to the stock market; and it is not the bull side or the bear side, but the right side. It took me longer to get that general principle fixed firmly in my mind than it did most of the more technical phases of the game of stock speculation" ----from REMINISCENCES OF A STOCK OPERATOR