.5. A "short" tradewas entered below the S 1 level. The potential targets were the previous day's low at S2 levels.The volatility expansion was very strong as the market fell through S2 at 808.3 levelsuggesting a potential target S3 at 798. At around 2pm, the market stabilized at S3 level andattempted a rally back towards S2 level.
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Trading Floor Pivots
,
5 / 8 / 0 7 2 x 6 PM
CSCO - 5 min L= 28.1 7 0.36i-- - - - - - - - - - - J.J
-
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5:8
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Trading Floor PivotsThe chart above shows Floor Pivots from the Cisco (CSCO) 5 minute chart. On May 8th, inanticipation of CSCO's earnings report, the company rallied above the pivot level. A tradesetup was presented when CSCO traded above the weekly high, but below the secondresistance at R2.CSCO prices traded above the previous day's high at 27.97 and Pivot at27.85 to suggest a potential bullish trend. At around 2 pm, CSCO closed above R2 to presenta low-risk day trading opportunity.
1. Enter a "long" trade 5 cents above resistance at R2.2. Place a "stop'' loss at the previous high (at $27.97).3. Place a "target" at the third resistance R3 (at $28.27).
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Globex (Overnight) Pivots*Pit traders use Globex or overnight trading information extensively to determine key markettrading levels for the current trading day. Globex trading hours start after the regular marketsclose and end before the regular markets open. For example, the Russell 2000 EMini futureson Chicago Mercantile Exchange (CME), the regular market hours are from 9:30 am ET to4: 15 pm ET. Globex trading hours for Russell 2000 futures starts at 4:30 pm ET and ends at9:29 am ET. Similarly, the Dow Emini futures on Chicago Board of Trade (CBOT), hasregular trading hours from 9:30 am ET to 5:00 pm ET. The Globex trading hours for DowEmini futures are between 5:01 pm ET to 9:30 am ET.Unlike floor pivots, most traders use only Globex High, Globex Low and Globex Pivot values.Globex High, Low and Close levels are used to compute the pivot price level. The Globexpivot value and the high and low levels are used for measuring market strength and weakness.During most trading days, the Globex pivots may be valid until noon as traders still rememberthe Globex high and low levels. They are very effective in the first hour of market open. Likeregular pivot levels, Globex highs and Globex lows are used for resistance and support levels.The first hour test of these levels and reversals from Globex highs and Globex lows aresignificant in intra-day trading.
ern o 15mm ~ = i z 5 7 4 +40
Globex Pivots
Globex Riot‘
- - - - -- - . - -
Pivot Point = (H+L+C)/3Where,H = High of Globex RangeL = Low of Globex RangeC = Close of Globex Range
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Globex pivots are for the overnight trading range. Globex pivot levels act as key resistanceand support levels. They are mostly effective during the first few hours (until lunch hour) oftrading. The example above shows the Russell Emini futures (ER2) from the 30 minute chart(24 hour chart). Globex high, low, Globex midpoint and Globex pivots are plotted on thechart. Arrows are placed on the chart to highlight the breakouts and breakdown from Globexhigh and low levels during the intra-day trading.
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Trading Globex (Overnight) Pivots
I Trading Globex PivotsThe chart above shows Globex pivot values from the Dow (YM) Emini Futures 15 minutechart. The chart shows January 22nd and January 23'd Globex pivots. On most trading days,when markets trade through Globex lows, it strongly suggests a weaker market, and whenmarkets trade above the Globex highs it suggests a stronger market. On January 22nd, YMtraded below the Globex low during the first hour at 12600 and traded all the way to a low of~ , traded above the Globex high during the first hour (above12500. On January ~ 3 ' YMGlobex pivot 12540) suggesting higher values for the rest of the day.
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Opening Range PivotsThe Opening Range time is the initial time frame of trading for a stock or commodity at thestart of each new trading session. For day-traders, this range could be the first 15 or 30 minutesand for swing or position trades it is the first hour range. Once this range is identified, the firsthour pivots and support/resistance levels are calculated. This range usually sets the directionfor the day and acts as important levels for intra-day trading.Trading using the Opening Range pivot produces excellent results. In stronger markets, a longtrade is initiated when prices pullback to the Opening Range pivot. A target for this trade is setat the first resistance. In weaker markets, prices crossing below the Opening Range pivot couldsignal a trend reversal and a short trade may be initiated.Confluence of daily pivot levels and first hour Opening Range Pivots could be significant intrading. Most days, the first hour of highs and lows clearly signal the market's strength.Trading below the pivot and the first hour lows set the market in a bearish mode. Similarly,trading above the first hour high and above the first hour pivot sets the market in a bullishmode. The advantage of using Opening Range pivots is market stability. In the first 30-60minutes (the amateur hour) of the market open, prices go through a series of gyrations to settleon a market direction for the rest of the day. Most seasoned traders wait for prices to pick aclear market direction with the opening range (the first hour) data before start trading.
Opening R a n ~ ePivot CalculationsI
-I
F i l e Hotir Piovts
Pivot Point (PP) = (H+L+C)MFirst Resistance (Rl) = 2*PP -LFirst Support (Sl) = 2*PP - HSecond Resistance (R2) = PP + (Rl-S1)Second Support (S2) = PP - (Rl-S1)Third Resistance (R3) = R1 + (H - L)Third Support (S3) = S 1 - (H - L)
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,,,
Trading Opening Range Pivots
Trading Opening Range (First Hour)The example above illustrates the Opening Range pivots from the ER2 5m chart. On January19,2007, ER2 traded in a narrow range in the first hour-Opening Range (shaded area) from778.7 to 78 1.9 and closed at 78 l.l(at marker 1). After the first hour of trading, ER2 set totrade above the Opening Range high at 78 1.9 and the Opening Range pivot at 780.6 signalingan upside day with range expansion.
I . Enter a "long" trade above the first hour high at 78 1-9.2. Place targets at R2 and R3 levels.3. Place a "stop" order few ticks below the pivot at 780.6.
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Trading Opening Range Pivots
Trading Opening Range (First Hour) with ABC PatternThe chart above shows Opening Range pivots along with an ABC pattern trade. On January18,2007, ER2 opened at a high of 791.8 and drifted lower in the first hour to trade near 784area. After the first hour of trading, ER2 attempted to rally to the first hour pivot at 788.4 toform an ABC pattern. The trend and market direction was weak as prices continued to tradebelow the first hour pivot and the first hour high. Prices attempted to rally, but around noon,ER2 could not close above the first hour pivot and reversed its direction to signal a potentialshort trade.1. Enter a "short" below the first hour pivot at 787.8.2. Place a "stop" order above the first hour pivot at 788.5.3. Place a target from 78.6% to 100% of AB range (from C) to 781.3.
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3.4. FibZone Pivots
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Fibonacci Zone Pivots John T. Jackson described a concept called "Zone Probability Pattern Analysis," in his bookDetecting High Profit Day Traders in the Futures Markets. In his book, he describes thedynamic statistical analysis of "Fibonacci Zones" using Open, High and Close to find highpercentage support and resistance zones for the entire trading day.Robert Krausz has completed extensive analysis on "High Probability of the Fibonacci Zones"(HPFZ) concept by using "Probability Matrix." Krausz used various close and opencombinations as price moves from zone to zone to achieve the highest probable Open to Lowcombination for the day.In this chapter, I present how I use Fibonacci Zone Pivots for my trading. I use HPFZ zoneconcept as boundaries for trading key support and resistance areas. For additional analysis,please read J.T. Jacksons' book on Zone Pattern Probability Analysis (See References)Computing FibZone pivot starts with calculating the pivot (High+Low+Close)/3 for thecurrent day and then projecting the "zone pivots" for next day. Adding daily range and itsmultiples to this pivot point gives various potential resistance and support levels. Theboundaries of these resistance/support levels are marked as FibZones. An extensive study hasbeen done on the relationship between yesterday's close and today's open within these zonesto find a potential daily "close" for the current day. I use FibZones in my personal trading andhave found them to be valid and useful. My usage of HPFZ is limited to finding intra dayresistance and support areas and not for the zone analysis.
FibZone Pivots@ER2 0 30mm L=79270
Pivot Point (PP) = (H+L+C)/3Daily Range (DR) = (H-L)First Resistance (Rl) = PP + 0.5*DRSecond Resistance (R2) = PP + DRFirst Support (Sl) = PP - 0.5*DRSecond Resistance (S2) = PP - DR
220
F~bZonhe ~o t s
Resistance Band (RB 1) = PP + 0.61 8*DRSupport Band (SB 1) = PP - 0.6 18*DRResistance Band (RB2) = PP + 1.382*DRSupport Band (SB2) = PP - 1.382*DR
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Trading Fibonacci Zone Pivots
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...........................1!......................................................
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Trading FibZone PivotsThe example above shows FibZone pivots plotted from the Russell Emini futures (ER2) 610chart. Fibzones are plotted at the end of the day for the next trading day. On February 6th,ER2sold-off and found support near the "support" band between the S50 to S62 range. In theafternoon, ER2 rallied back from "support band" (A) and closed in the "resistance band" (B).The following day, ER2 had a brief sell-off to the pivot point (C) and rallied to the"resistance" band (D). The first test of resistance to the rally came in the afternoon at 100% ofrange test E. A pullback to the "resistance" band-R50 to R62 is expected after the morningrally to (F). Another continuation of the rally, sent prices to 138% of previous day rangeabove pivot level (G).
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Trading Fibonacci Zone Pivots@ERB.D - 30 mln L=792 70 2 2 0
............................
....... ...........
......................
.............
...............
. . .
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Chapter 4: Fibonacci4.1. Fibonacci Trading
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Fibonacci MethodsFibonacci numbers are pervasive in the universe and were originally derived by LeonardoFibonacci. The basic Fibonacci ratio or "Fib ratio" is the Golden Ratio (1.618). FibonacciNumbers are a sequence of numbers where each number is the sum of the previous twonumbers.The series of Fib Numbers begin as follows: 1,1,2,3,5,8,13 ~ 2 1 ~ 3 4 ~ 5 5 ~ 8 9 ~ 1 417,610..4~233~..3There are plenty of materials and books about the theory of how these numbers exist in natureand in the financial world. A list of the most important Fib ratios in the financial world whichare derived by squaring, square-roots and reciprocating the actual Fibonacci Numbers aredepicted below:Key Set of Fibonacci Derived Ratios in Trading are:0.382, 0.500, -618, 0.786, 1.0, 1.272, 1.618, 2.0,2.62, 3.62,4.62Secondary Set of Fibonacci Derived Ratios in Trading are:0.236, 0.486,0.886, 1.13,2.236, 3.14,4.236Most trading software packages have Fibonacci drawing tools which can show Fibretracements, Fib Extensions and Fib Projections. In addition. Fib Numbers are also applied to"time" and to "price" in trading.
Tvpes of FibonacciRetracement: From the swing XA, aFibonacci ratio length is retraced to B.Extension: From the swing XA, morethan 100% of the swing XA isextended from A to B.Projection: From the swing XA, aretracement is made to form the ABleg. The swing XA is projected from Bto C.From A
X4 = BC
M =AC
Expansion: From the swing XA, aretracement is made at B to form AB.A projection is plotted from A in thesame direction and length of XA to C.
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Fibonacci Trading
Fibonacci TradingThe chart above illustrates Fibonacci trading from the Russell Emini futures (ER2) 10 minutechart. First, a retracement is shown in the shaded area for XA to AB. Secondly, an extensionof XA to AB is shown. Thirdly, the projection of the XA length is made from B to C. In theforgoing projection example, B was retraced to .62 of XA and then a projection of 1.27 to1.62 of XA swing is expected. C was formed at 1.38 of XA.
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58
Fibonacci Drawing Tools- - -
-
Retracement and Extension Drawing Tools
sls.00
Most software packages have Fib retracementand extension drawing tools. These toolsallow a user to pick a "swing high" and"swing low" and draw retracement andexpansion levels. The Fib levels can be alsocustomized for various Fib Numbers.Another Fib drawing tool is an extensiontool. This tool lets a user pick three differentswing points A, B and C and then draw"swing" extensions from C. This is a veryvaluable tool since it plots fib. levels from thetrade level C.
Fibonacci Time Extension ToolFibonacci extensions can also be measured for"time" levels. Most software packages alsoprovide a Time Extension tool.This tool helps find key turning points using"Fib Time." It allows a user to pick a "swinglow" at A and a "swing high" at B and plotthe Fib Time extensions from this time-frame.The projected time levels provide the userwith potential "swing" turn points.
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Fibonacci Clusters
.
. . ...-....... ...........
Fibonacci ClustersA confluence of Fib. retracement numbers signifies a stronger area of support and resistance.The confluence of multiple Fibonacci retracements in a fairly tight area are computed usingprior swings both retracement and extensions with certain criteria. Then each Fibretracementlextension level is grouped to generate a confluence within some threshold to findFibonacci clusters in an area. These "cluster" levels are more significant than a single fibretracement itself. The trades are either initiated or closed at these confluence levels.
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I
Trading Fibonacci Retracement LevelsTick Bars L=816.60 -0.20
rFibonacci Ratios
I
Trading Fibonacci Retracement LevelsThe chart above illustrates an example of trading Fibonacci ratio levels from the RussellEmini futues (ER2) 610 tick chart. One of the effective method to trade Fibonacci levels is totrade pullbacks in the direction of its primary trend near the Fibonacci retracement levels. Forthe first "swing" at AB, trade reversal occurred at the 61.8% retracement level. A "long"trade is entered at C with a "stop" order placed below A. On the second "swingvat CD, a"long" trade is entered at the 61.8% retracement level. The swing retraced to E to 78.6%, butrallied back into DE swing. For the second trade, a "stop" order is placed at C. Targets are setat the top of "swing highs" at A, D, F and H.
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I
Symmetry Patterns
.
Markets demonstrate repetitive patterns where prices oscillate between one set of price ratiosto another making price projections possible. Market trends can be defined by geometricrelationships as they exhibit harmonic relationships between the price and time swings.Markets also form "cycles" around the price and time levels. Many investorsltraders use"cycles" and "harmonic" relationships to project future swing prices and times."Symmetry" is visible in all markets and in all time-frames. "Symmetric" rallies and declinesgive traders an advantage to determine the key turning points. A cluster of similar extensionsand similar retracements at key price ranges, or some important levels provide insights intofuture significant resistance and support levels. In addition to knowing key turning points, thebenefits of trading symmetric "priceltime" cluster levels include low-risk trades.Gann, Fibonacci and Elliott all have studied market symmetry and found valid theories. Thesepatterns exist in all forms in nature and certainly exist in the markets. One of the best ways toconfirm "Symmetry" in the markets is to check "price" and "time" using two or more clusterconfirmations. Another key method to compute these patterns is to use "percentage change ofprice" between market "highs" and market "lows." "Symmetry" is a science by itself andtraders take great advantage of knowing the potential turning points/levels using thesemethods.
D
A
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The chart above illustrates the "Symmetry" pattern from the Russell 2000 futures ( E M ) 6 10tick chart. Symmetrical swing lengths are shown after a 50% retracement at BC swing.Market "symmetry" of 100% extension is expected after a retracement of less than 50%retracement levels. If the retracement exceeds 50%, the extension may be less than or equal to100%.1. After 'BC' retracement, enter a "long" trade one-tick above the B.2. Place a "stop" order one-tick below the low of "C".3. Target 100% of the AB range from level C to D.4. Another potential retracement is expected at D to 50% of the entire range of AD.
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Trading Symmetry PatternsSymmetry
I
I
II
Trading SymmetryThe example above shows "Symmetry" and cluster of harmonic ratios from the Russell 2000(ER2) 610 tick chart. After BC retracement of 88.6%, a Symmetrical extension at CD isformed near the "cluster" zone. This zone is where two or more harmonic levels are groupedat a single level. The "cluster" is formed at the retracement of 127% to 138% of AB and127% of BC swings. The zone also acts as key support and resistance areas for trading. Afteranother retracement of DE at 88.6% from the "cluster" zone, ER2 rallied to new intra-dayhighs.
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1ii
4.3. Market Fractals
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Market FractalsFinancial markets are Complex, IVon-Linear and Chaotic. Chaos is the highest form of orderand posses a highly deterministic behavior. These chaotic market behaviors are represented bygraphical structures usually initiated by a pattern called "Market Fractal." Trader's decisionsare usually decided by complex series of events and these events influence price changes in themarkets. Many times, all these events are rhythmically synchronized with Momentum,Volume, Time and Price. Price is the last one in this series to be effected. Traders getsignificant benefits from knowing the beginning of market structures (Fractals). It's not easy toidentify market "Fractals" but there may be a set of rules and patternslevents which may helptraders to identify them."Fractals" are similar patterns which repeat themselves. A beginning "Fractal" patternresembles the overall pattern of the entire market structures. Fibonacci numbers and Elliottwave patterns were first initiated by "Fractals". On the expansion, Elliott waves consist of aseries of "Fractal" structures.In a simplest market form, as an example, a "Fractal" consists of 5 bars. After a prolongeddowntrend in the markets, a 5-bar "Fractal" is formed to signal a potential change in the trend.This "Fractal" has three bars with higher highs and two bars with lower lows. Trades areinitiated when another higher-high is formed after this 5-bar "Fractal". A bearish "Fractal" isthe reverse of the above.As in any technical indicator, "Fractals" form, fail, re-fail and re-form. "Fractals" work in allmarkets and in all time-frames. Fractal theory is very powerful, but it does need confirmationindicators such as Momentum, Divergence and price-action to be valid.
Fractal
I
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Trading Fractal Patterns
.
Trading Fractal PatternsThe example above shows a "Fractal" pattern formation from the Nasdsq Emini futures (NQ)610 tick chart. On March 29,2007, NQ futures were in a downtrend all day and lost over 20points. At about 2:30pm, NQ made a series of higher-highs followed by two lower-low bars toform a "Fractal." This "Fractal" suggests that a down-trend may be over and a significanttrend change may be in the works.
1. After a 5-bar "Fractal" formation, wait for a bar to close above the previous bar's highand enter a "long" trade above the previous bar's high.2. Enter a "stop" loss order below the "Fractal" patterns low.3. Place a "target" at previous "swing high."
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Trading Fractal Patterns
,
Trading Fractal Patterns
The chart above illustrates an example of sell "Fractal" pattern from the Nasdaq futures (NQ).NQ futures rallied in the morning session and closed near 1808. A series of bars attempted totrade "lower lows" and "higher highs" to form a "Fractal" pattern. A trigger bar is anticipatedfor a short-sell after a "fractal" formation is complete.1. Wait for trigger bar, which is a "close" below the low of the previous bar toconfirm the "fractal" setup.2. Short below the low of the trigger bar.3. Place a "stop" order one tick above the high of the trigger bar.4. Target a major "swing low" prior to the "Fractal" formation.
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ABC PatternsThe basic "ABC" pattern is first described in H.M. Gartley's book, Profits in the Stock Market(1935). This pattern is shaped like a lightning bolt and signals a trend, a retracement and theresumption of the trend. This pattern is also called the "ABC Wave" or 1-2-3 pattern bytechnical analysts.The "ABC" patterns forecast key market turning points and profit targets for traders. "ABC"patterns pinpoint important pivot levels with high and low prices and identify key tradingzones.The key point in identifying a "ABC" is correctly finding the A, B, and C pivot points in achart. These key pivots are found using for various "pivot strength" levels, and for itscorrection waves. Once A, B, and C pivots are identified, an Auto-levels algorithm is appliedto determine the confluence level "D". This area is called "Potential Reversal Zone" (PRZ).The "C" pivot in "ABC" patterns are determined by the Fibonacci retracement of (38.2 to61-8 percent) of AB swing. The projection from "C" level is measured using fib-ratios of ABand BC swings. Some traders use the confluence of these ratio levels as areas for profittaking.
D
A\
\
4
DK =0.382to 0.886,4BBD =1.232 to 2.618BC
A,4C= 0.382 to 0.886
BD =L.232to 2.618BC
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ABC Bullish Patternr"""
- - - -- - -
- --
- -- -
-
--
--
-
1.62 BC: 1448.1....................................................
i
..................
1.27 BC: 1444.5
1
0.89 AB: 1440.6I3
0.79 AB: 1439.6
Iit
0.38 AB: 1435.4
........................
Trading an ABC Bullish PatternThe example above shows an ABC pattern from the S&P Emini futures 30 minute chart. Afterformation of the AB swing, the "C" pivot point was expected around 62% of AB range. Pricetrading above the previous bar's high signaled a potential "long" trade.1. Enter a "long" trade above the previous bar's "high."
2. Place a "stop" order below level "C."3. Set "targets" at 100% of AB range and at 127% of BC range.
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Target
----+
Target ----.---+
The example above illustrates an ABC Bearish reversal pattern in daily Gold futures chart.Gold made a 20-day swing high of 658 in December. During mid December, Gold reached aswing low of 621 (at B). At the beginning of January 2007, Gold retraced 78.6% of the ABlevel to another "swing high" at "C" to complete the ABC "bearish" pattern. A wide-rangebar signaled a potential short trade.1. Enter a "short" trade below the low of previous bar 63 1 (38% of the AB range).2. Place a "stop" order above level C at 650.3. Set "targets" at 100% of AB range (at 605) and 127 to 138% of BC range.
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5.2. Gartley Pattern
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Gartley PatternIn 1932, H.M. Gartley described a 5-point "Gartley" trading pattern in his book, Profits in theStock Market. Larry Pesavento has improved this pattern with Fibonacci ratios and establishedrules on how to trade the "Gartley" pattern in his book, Fibonacci Ratios with PatternRecognition. There are many other authors who have worked on this pattern, but the best workto my knowledge is done by Scott Carney in his books of "Harmonic Trading"."Gartley" patterns have five points starting at point X, which is the lowest of all points in abullish setup and the highest of all points in a bearish setup. For bullish Gartley, from X, pricesrise to form a higher swing-high at "A". From A, a retracement swing low "B" is formedwithin 0.382 to 0.6 18 of XA range. Another swing high "C" is formed at 0.6 18 of AB. Point"D" is formed in Potential Reversal Zone (PRZ) within 0.61 8 to 0.786 of XA swing, or 1.27 to1.62 of BC range. D is the decision or buy trade point in bullish "Gartley" setup. Point D isalso a sell trade point in a bearish "Gartley" setup.Trade: A confluence of Fib ratio levels is calculated to find a Potential Reversal Zone (PRZ).This is the area where Gartley pattern formations are anticipated for reversals and for potentialtrade entries. Trades are only placed after "D" formation and if the market makes a reversal bar(wide-range or higher-high) from the PRZ.Target: The first set of targets are the price levels