Bulkowski's Fibonacci Tutorial
Bulkowski's Fibonacci Tutorial
I show a chart of Flir I show a chart of Flir Systems (FLIR) on Systems (FLIR) on the daily scale. the daily scale.
Points
Points AA,, BB, and, and DD areare major turning points. major turning points. Point
Point CC is a minoris a minor reversal.
reversal.
When looking for When looking for Fibonacci retraces or Fibonacci retraces or extensions, you will extensions, you will want to select
want to select
turning points that turning points that are of the same are of the same
magnitude. By that I magnitude. By that I mean look for large, mean look for large, major turning points major turning points of similar size, or of similar size, or
focus on four smaller turning points, also of the same size. focus on four smaller turning points, also of the same size.
You should probably av
You should probably avoid mixing small and large turning oid mixing small and large turning points because thatpoints because that may give you unreliable results (but you can try it). Many software packages may give you unreliable results (but you can try it). Many software packages will draw the Fibonacci lines on your chart for you.
will draw the Fibonacci lines on your chart for you.
Point
Point DD retraces almost 62% of theretraces almost 62% of the ABAB move. The next section explains how Imove. The next section explains how I used the chart to compute the retrace.
used the chart to compute the retrace.
Fibonacci Retracements
Fibonacci Retracements
The
The fifigure shows an ABCD wave. Think of each turning gure shows an ABCD wave. Think of each turning point as a peak orpoint as a peak or
valley on the price chart, just like in the previous chart. valley on the price chart, just like in the previous chart.
Assume that point A is at 10 and B is at 15. There are three main retrace Assume that point A is at 10 and B is at 15. There are three main retrace values that I like to use: 38%, 50%
values that I like to use: 38%, 50% and 62%. How we derive those values and 62%. How we derive those values andand others is not important, nor is the Fibonacci sequence.
others is not important, nor is the Fibonacci sequence.
If we take the price di
If we take the price diff ff erence from A to B (15 - 10 = 5) and multiply it by theerence from A to B (15 - 10 = 5) and multiply it by the
three Fib values, we get 5 x 38% = 1.90, 5 x 50% = 2.50, and 5 x 62% = 3.10. three Fib values, we get 5 x 38% = 1.90, 5 x 50% = 2.50, and 5 x 62% = 3.10.
When you add those values to A or
subtract them from B, you get three possible turning points: 13.10, 12.50, and 11.90.
The stock could turn at any of those three values as well as at other values.
If I want to buy the stock represented by the chart, I will wait for a 62% retrace and then pounce. That means placing a buy order at 11.90 in this example, or about where point C forms. Other Fibonacci retracement values are 79% and 86%.
Fibonacci Time Extensions
To help predict when point C will arrive, you can apply the same math to the time scale. I show that with points E, F, and G. If the time between E and F is 30 calendar days then multiply it by 38% to get G: 30 x 38% = 11 calendar days. Add 11 days to F to predict turning point G. Point H might be a 162% extension of the EF move.
You can use trading days or price bars, if you wish, and maybe other
extension values might work better, such as 18%, 27%, 62% and 162%. Since I don't use Fib extensions on the time scale, you will have tofigure out what
works best for your application.
Fibonacci Price Extensions
Let's say that you bought the stock at C. At what price will D arrive?
Since this is not a retracement but an extension of the AB move, we can
apply one of the extension values. I could use 1.18 (118%), 1.27 (127%), 1.618 (162%) or 2.618 (262%). The 38% extension (1.38) is one I like. We will use that in this example.
The AB move is 5 points (10 to 15), so 38% of that is 1.90 which I add to the price of B (15) to get D (16.90). Thus, if I bought the stock at C, I would
consider selling if the stock approached 17. It would not be an automatic sale, but I would search the area for overhead resistance that might cause price to stall.
The same math applies to downward price trends. Figure out the length of the first wave (use BC in this example) and calculate the retrace or extension
of that move. Add the retrace value to C (for a higher target) or subtract the extension value from C to get a lower target.
Bulkowski's Fibonacci Price Targets
This article discusses how to use Fibonacci retracements and extensions to determine price targets for securities.
Fibonacci Retracements
Let's start with the daily chart of
Boeing (BA). Notice the straight-line run down in November, starting at point A and bottoming at point B. If Fibonacci retracements work, I would expect price to retrace or climb back up that steep decline
between 38% and 62%. You can think of this as how far a ball would bounce after you drop it off
a building.
I show the most common retrace values as three horizontal red lines. The lowest one is a 38% retrace of the AB move. The ball bounces about a third of the way up the building.
The middle line marks a 50% bounce and the top line shows a 62% retrace. I consider the 62% retrace value as most reliable of the three. Trading a stock expecting a reversal at the 38% or 50% retrace values is risky because price often continues moving through them. The chart shows an example of this. Price climbs to C, blowing right through the 38% and 50% retrace lines.
The downside to this argument is that if you wait for a 62% retrace, the stock may reverse at 38% or 50%, and you'll remain out of a promising trade.
Often you will want to look for nearby support or resistance to better
determine where price is going to stop. And when it does approach a retrace value, think of it as an area and not a single price point. For example, the
chart shows price approaching but not quite reaching the 62% retrace value, but it's still close. Notice on the far left a congestion area, circled in green. Price overlaps itself for three days before the downtrend resumes.
I would view this congestion or overhead resistance area as a weak one, but when coupled with a 62% Fibonacci retrace, it was strong enough to halt the rise and turn price down.
Fibonacci Price Targets Long Example
That is how Fibonacci retracements are supposed to work, but they apply to upward price trends as well. That is how I use them when buying a stock.
For example,
consider the trade in Tesoro Corporation (TSO) I made starting on August 21, 2008.
Believing that the long-term
downtrend that began in October 2007 was over, and as price neared the 62% Fibonacci
retrace of the A-B move, I jumped in and bought the stock.
Suspecting that I had made a mistake, I sold it on September 3 for a small profit.
The stock continued much lower after I sold.
Fibonacci Price Targets Selection Criteria
The following tips may help you use Fibonacci retracements.
• Select a significant move from swing high to swing low (or the reverse).
You want a move tall enough to represent a profitable trade should
price return to the swing high/low after purchase.
• Look for a straight-line run either up or down. It's best if price pauses only briefly during the move, otherwise it could resemble a measured
move up or down.
• I consider the 62% retracement value the most reliable. Measure the move from swing high/low to swing low/high and multiply it by your favorite retracement value (0.38, 0.5, 0.62 or other value) and then add it to the swing low (downtrends) or subtract it from the swing high
(uptrends).
• Watch for overhead resistance or underlying support as price
approaches the end of the trend. In the example above, when price drops to point B, the end of the trend, it could stall or even reverse there. In this example, price just continued lower.
• Fibonacci retracements don't work every time. Sometimes it seems the retracement value you depend on is the one that doesn't work. If you buy at a 38% retracement, the stock will continue lower until it hits 62%. If you wait for 62%, it reverses at 38%. Go figure...
Fibonacci Extensions
Now let's turn to Fibonacci extensions. You may not have heard of them
which suggests it's not a popular technique. I don't use it, but that's just me.
Stock prices move in waves. After a strong move, the stock will pause and
retrace part of the move followed by a resumption of its run. But how far will it travel? Answer: 38% of the prior move.
Look at the chart of Boeing again. The downhill run begins at A and ends at B. The height of the move is 54.65 - 36.17 or 18.48. Multiply the height by 38% to get the extension value and subtract it from the low price at B: 18.48 x
38% = 7.02, 36.17 - 7.02 = 29.14.
The stock
reaches a low of 29.07 at C. Notice how deliciously close price comes to the target, missing it by just 7 cents. Fibonacci extensions work for upward price moves too. You calculate it in the same manner,
using a major swing high to swing low to determine the height, multiply it by 38%, and then add the result to the swing high price to get a target.
0.618 and 1.618 Extensions
You might consider using the 38% extension as a minimum price target and the 162% extension as the
maximum.
Let me explain how they use the 0.618 and 1.618 extensions.
The chart on the left shows a five
wave movement of price, following the basic motive wave progression of the Elliott Wave theory. That is a complicated way of saying price moves in waves.
The Fisher team indicates that if the price trend is just starting out (it's in wave two or three), then use the larger 1.618 extension.
If price has been trending upward and has formed several waves, the trend end may be closer. In that case, use the 0.618 extension.
In either case, measure the height of the swing move from the dotted line on the bottom to the associated peak and multiply the height by either 0.618 or 1.618, depending on whether the price trend is new (wave two or three) or old (wave four or five).
Bulkowski's Fibonacci Retrace for Stop
Placement
In a rising price trend, price moves up in a rise -- fall pattern, often retracing a portion of the prior climb. The median retrace is 59%. The most frequent retrace values are, in order, 61%, 56%, 50% and 55%. On a
cumulative basis, a third (33%) of the samples stopped declining on or before retracing half (50%) of the prior up move. Two thirds retraced less than 67%.
The numbers suggest that a stop placed no closer than 67% of the prior up move will protect your position in two out of every three trades.
New research suggests that Fibonacci retracements off er no benefit in swing
trading and that probably holds true for stop placement
Fibonacci Retrace-Stop Background
I found usable patterns in 766 stocks (but additional stocks were not used because they trended downward) and found 1,956 samples. About a quarter (535 samples) came from 1994 to 2003, which includes the 2000 to 2002 bear market. The rest came from 471 stocks from July 2005 to August 2006 (a bull market).
In the test, I used about 525 samples from inverted and ascending scallop chart patterns along with 471 stocks that gave additional patterns found manually.
I measured the decline from B to C as a percentage of the rise from A to B (see the above figure). Point A is the start of the uptrend, B is the uptrend
Fibonacci Retrace-Stop Results
The top five most frequently occurring percentage retraces are:
1. 61% 2. 56% 3. 50% 4. 55%
5. 44% and 59% (tied)
You will notice that the first (61%) and third
(50%), are also found in the Fibonacci
retrace list of 38.2%, 50% and 61.8%. There was no spike at the 38% retrace value in my data.
The median retrace is 59%. That means half the samples retraced less than 59% and half retraced more.
On a cumulative basis, the following list shows how often a retrace occurs.
In words, a third of the samples (33%) will decline less than half (50%) the distance from B to A (see above chart). Two thirds will retrace less than 67%. Nearly all, 90%, will retrace less than 81% of the B to A move.
Fibonacci Retrace-Stops
Measure the recent swing move from A to B. Take 67% of that move and
subtract it from B. Place a stop no closer than the result. That should prevent you from being stopped out in two out of every three trades. For example, if point A is at 20, B is 25, then place a stop below 21.65. The move from A to B is 5 points and 67% of this is 3.35. Subtracted from B gives the stop price of 21.65.
As a sanity check, a 3.35 point drop from 25 represents a decline of 13.4%, which is quite high. You might want to narrow your stop, but the risk of being stopped will rise if you do.
Bulkowski's Day Trading Setup
This page discusses a day trading setup for stocks.
Day Trading Setup
Here is what to look for.
1. Select an actively traded stock with narrow bid/asked prices. 2. Find a stock with a straight-line run in price, either up or down. 3. Price begins to retrace the prior move.
4. At the turn, the ticker tape for the stock may pause or slow considerably.
5. Look for the 10-minute market trend (a line chart showing the Nasdaq/ Dow/S&P or other index for the last 10 minutes) to be moving in the same direction as the stock. That means both should turn and head in the new direction. You don't want tofight the market trend where the
stock goes down and the market up, or the reverse, stock up/market down. If the stock and market head in the same direction, then that is the entry signal, especially if the ticker starts moving again.
6. Expect a reversal at 38% or 50% of the prior move.
7. When price reaches the 38% level and the market reverses trend and the stock ticker tape slows or stalls, then close out the trade. If the
market is still strong and so is the stock and ticker, hold on for the 50% retrace level.
You can place another shorter straight-line run trade when price reverses again, but doing this a third time risks a losing trade. In other words, the stock will be building a symmetrical triangle with converging tops and bottoms, so trading the swings becomes more risky because they are narrower. Do not swing trade consecutively more than twice unless the swings are excessively wide (and even that will be risky).
Two Trade Examples
Pictured above is KLAC (KLA-Tencor Corp.) stock on August 22, 2007, one-minute scale from the opening bell. Price gapped open higher from the prior day and peaked at 59.90 (point A), the first price bar. Price tumbled and I
spotted the stock at around 9:40. At point D, price made a green bar but rarely does a straight-line run down reverse after just one bar, so I waited.
At E, 58.85, I bought the stock and notes from the trade say that the Nasdaq had turned up (viewing the 10-minute trend) and the stock looked to be forming a base. The thinking is that after a strong downtrend, price will bounce. I wanted to trade that bounce.
How far would the bounce take price? The high at A was 59.90 and the low at B was 58.77, for a diff erence of $1.13. Using a Fibonacci retrace of 38%, that
would mean a bounce up to 59.20. That became my target price.
Price moved up to C and then stalled, so I sold at F (59.22). Notice that price bounced to the first Fibonacci retrace level (59.20) of the AB move. Notes
from the trade say that the Nasdaq was turning down, and I expected price to follow.
I sat and watched price drop to G. Using the BC move up, I calculated that the 50% Fibonacci retrace would bottom at 59.25 - ((59.25 - 58.74) x 50%) or
about 59.00. The stock reached a low of 58.98. I bought at G (59.00) and rode it up. My notes from the trade said "I think this will turn here. Market (Nasdaq 10 minute trend) just shot up after I bought. This is at the 50% Fibonacci
retrace of the prior move down.
I assumed that price would double top, or at least attempt to make a second top before tumbling. Failure to make a new high is called a 2B pattern. The 59.20 price seemed like a good target, so that is what I used. When price climbed to H and the "Ticker (a running list of trades as they occur) stalled near the price of the old high at C, and I thought we'd get to 59.20. It didn't so I'm out at 59.19." The stock dropped from there.
