In this last section, we will focus on spotting high-probability objectives for trades.
Figure 60
I will be specifically referring to the multiples of 1.382 and 2.0, which are numbers within the Fibonacci sequence because they are crucial to a technique I call “reverse Fibonacci.”
With reverse Fibonacci, I measure the length of the previous wave, multiply that by 1.382 or 2.0 and project up-ward, which gives me a specific price level.
Why are these levels high-probability price targets? Even those who are not familiar with the Wave Principle know that whenever you are trying to project or forecast extremes in impulse waves – for example the top of a third wave – typically, you use a Fibonacci 1.618 multiple of wave 1. That is, use
an impulse wave to measure another impulse wave. Also, within corrective wave patterns, use the length of wave A to project the length of wave C.
The technique of reverse Fibonacci is a little different from these Fibonacci projections that identify terminat-ing points or targets. As a trader, I am not necessarily lookterminat-ing to sell top-tick or bottom top-tick. Instead, I am looking for a high-probability objective I can safely count on or bank on. So I want to identify a corrective pullback, initiate a position and, ideally, at the same time give the broker my exit price, too.
How did I come up with these 1.382 and 2.0 numbers? I spent about six months doing an exhaustive study on how far moves that make new price extremes continue, so I came up with these “reverse Fibonacci” relation-ships. I discovered that about 90 percent of the time, prices attain a 1.382 multiple of the previous swing, and about 70 percent of the time, prices will attain a 2.0 multiple.
Notice on Figure 60 that prices exceed the 2.0 level on this chart. Remember, I am not looking to make top-tick;
as a trader, I am looking to attain a high probability objective, make a profit and live to trade another day. You
Figure 61
The first example is taken from Trea-sury bonds on the weekly level. To project where a correction may lead, I simply multiply the first move down on the left (marked with a black line) by 2.0. That gives me a projection, which I have marked with a red line.
On this chart, prices push moderately above 2.0 and then reverse in a sharp, tradable reversal. Now we go back to the previous swing up to the 2.0 target (marked by a black line) and multiply that by 1.382, which gives us another target to shoot for.
In this example, we miss the move down at the first 1.382 by just a tick or two; but still, it is a high-probability objective. Over to the right of the chart, there is a 2.0 multiple of the previous swing and a 1.382 multiple of the pre-vious swing. Again, I have to remind you that these levels will be exceeded either moderately or sometimes sub-stantially. But my style of trading is to get in, make my money and get out. I am not looking to get 100 percent of the trend. As a trader, I want to capture 80 percent of the trend. I found that these numbers, these relationships and this reverse Fibonacci application worked out well for me, which is why I am sharing them with you.
Figure 62
This Figure 62 is an exciting chart. It’s a weekly chart for crude oil. Our swing is down on the left, marked by a black line. Then we have our 2.0 multiple of that swing: we nick it, one goes above
it, and then we see a very nice sell-off of almost $15. You can use this technique as a guideline for locating possible reversals in price action, rather than for exit points or objectives for positions.
32 Chapter 4 — How To Spot High-Probability Trading Opportunities in Commodities
How to Spot Trading Opportunities in Commodities Using the Wave Principle — Part 1
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Figure 63
This 20-minute price chart of the S&P in Figure 63 represents more than five days’ worth of price action. I want to walk you through swing by swing and show you the validity of the tech-nique.
Figure 64
Focusing on the left-hand side of the chart and now on a 10-minute time frame, I have taken this first swing, marked in black, and multiplied it both by 1.382 and 2.0. My target is that third blue line down. As you see, we hit it, exceed it moderately and prices reverse.
Chapter 4 — How To Spot High-Probability Trading Opportunities in Commodities
Figure 65
Then I take this small swing marked in black in Figure 65 and multiply it by 1.382 and 2.0. Again, we achieve both levels, exceed them moderately and prices reverse.
Figure 66
Now we focus on the next swing marked in black, and we attain our 1.382, exceed it a little bit and reverse nicely in this three-wave structure.
34 Chapter 4 — How To Spot High-Probability Trading Opportunities in Commodities
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Figure 67
Here is a small swing down. As you can see, we attain the 1.382 multiple of the previous swing, we exceed it moderately and prices reverse.
Figure 68
Here is a three-wave move up marked in black. Again we go to 1.382, hit the objective and prices reverse.
You can use these techniques by themselves. However, I’ve been using Elliott wave analysis for 13 years, and I am now more of a believer in the Wave Principle than I ever have been.
This S&P chart we are analyzing is just the best example of why I like to combine these proven techniques with the Wave Principle. For instance, notice this move we have just marked in black is a clear three-wave structure to the upside. It is a three-wave coun-tertrend move, so I know the larger trend is still down. Although these
Chapter 4 — How To Spot High-Probability Trading Opportunities in Commodities
Figure 69
These 1.382 and 2.0 multiples are excellent exit points, objectives and areas to look for potential reversals. I am still working with that basic S&P 20-minute chart I showed as the first chart in this series (Figure 63), while walking you through on the 10-minute price level. This is intra-day or day trading on this level, and you can see how effective the approach is.
Figure 70
Now in Figure 70, we finally come to an example in this series where we do not attain the 1.382 multiple. This is a very important lesson. Nothing works 100 percent of the time. The best we can hope for is maybe 90 to 95 per-cent. Even if you had a technique that worked 99 percent of the time, the X variable is still out there, which stands for the unknown. Sometimes things simply do not work. You may be hold-ing 4 aces but it still can be beaten by a royal flush.
36 Chapter 4 — How To Spot High-Probability Trading Opportunities in Commodities
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Figure 71
Our 1.382 multiple was not hit, so let’s look at the smaller subdivisions.
Here we attain the 2.0 multiple of the previous swing.
Figure 72
Here we attain the 2.0 multiple of the previous swing.
Chapter 4 — How To Spot High-Probability Trading Opportunities in Commodities
Figure 73
Here we attain the 1.382 multiple of the previous swing. So even though we are not able to attain the 1.382 multiple of the previous swing of the larger move, there are many sub-moves we are still able to identify with, such as strong potential turning points, exit points or reversal points.
Figure 74
Moving forward in time on this S&P chart, here is a nice objective that is easily attained by the S&P.
38 Chapter 4 — How To Spot High-Probability Trading Opportunities in Commodities
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Figure 75
In addition to looking for just the big swing here, I decided to walk it through smaller swings. Notice I am taking the previous swing and mul-tiplying it by 1.382 or 2.0 for a high-probability objective. As you can see, prices attain the objective and then turn down; they do so in three waves.
Remember, three-wave moves are countertrend and tend to be contained by parallel lines.
Figure 76
It moves to 1.382, we come down and touch it and prices reverse.
Chapter 4 — How To Spot High-Probability Trading Opportunities in Commodities
Figure 77
We hit it here at 1.382…
Figure 78
…and again here at 2.0.
40 Chapter 4 — How To Spot High-Probability Trading Opportunities in Commodities
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Figure 79
Here is another example of the same technique.
Figure 80
Here, I am looking at only two vari-ables, 1.382 and 2.0.
Chapter 4 — How To Spot High-Probability Trading Opportunities in Commodities
Figure 81
Here is a really nice example where we attain a 1.382 multiple, exceed it moderately and then prices reverse.
Figure 84
I like this chart in Figure 84 the best.
With the technique of determining high-probability objectives, we used only two multiples, 1.382 and 2.0, and every calculation I showed you for the last 10 charts is attained. We identified 18 potential targets, and we achieved 18 specific targets.
Notice many of these objectives are simply reversals. We hit them and re-verse. That is one way you can use the technique or you can simply use them as profit-taking objectives.
42 Chapter 4 — How To Spot High-Probability Trading Opportunities in Commodities
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Chapter 4 Key Points
I am not much of a dancer; I don’t know how to waltz or tango, but my mom did teach me the box step. It is basically 1, 2, 3, 4; 1, 2, 3, 4. In this course, I have taught you the box step.
Step 1: You learned the basics of the Wave Principle, and more importantly, you learned specifically