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CONTENTS
FOREWORD xiACKNOWLEDGMENTS xiiiINTRODUCTION 1CHAPTER 1 UNDERSTANDING HOW FIBONACCI WORKS 11
 
SECTIONI THE MOST IMPORTANT FIBONACCI TOOLS 15
 
CHAPTER 2 HOW TO FIND IMPORTANT SUPPORT ANDRESISTANCE LEVELS WITH FIBONACCI 17
CHAPTER 3 USING FIBZONES TO IDENTIFY HIGH-PROBABILITY REVERSALS 43
                                          
x ContentsSECTION Wh MY FAVORITE FIBONACCI STRATEGIES 55
CHAPTER 4 How To Enter Trends Using The TrendTrigger Strategy 59CHAPTER 5 JHE REFLECTION REVERSAL METHOD 67CHAPTER 6 TRADING PULLBACKS USING THE TRIPLECROWN STRATEGY 83CHAPTER 7 TWO-STEP PATTERNS (TSP) 97Capture Strong Trends With The Symmetrical TSP 100Enter Pullbacks Using The Gartley TSP 1Find Powerful Reversals With The Butterfly TSP 123CHAPTER 8 HEISENBERG 200 137CHAPTER 9 SHARK ATTACK 153
CHAPTER 10 AiR POCKETS 165
N TO PROPER EXECUTION 189
SECTION Ill IT BOILS DOW
cuapTer 11 ENTRY PATTERNS: HOW TO ENTER THE TRADE 191
CHAPTER 12 RISK MANAGEMENT: IDENTIFYING ANDMANAGING THE KEY AREAS OF RISK CONTROL 211219
BIBLIOGRAPHYABOUT THE AUTHOR 221
a 
 
 
 
 
INTRODUCTION
When I first started trading 12 years ago, I was looking for the secret answer to trad-ing. What was the one indicator, the one method, the one guru, that could tell me whento buy and sell?
To find it, I spent thousands of hours and dollars on books on the subject of techni-cal analysis. I had myself tutored directly and indirectly by some extremely success-ful traders who have been in the thick of this business for years.
From my initial exposure to the market, to the present day, this 12-year journey hasbeen filled with reward, humility, excitement, disappointment, and hard-knock edu-cation. Early on, my trading was very volatile and unpredictable. Much of thatroller-coaster ride was due to the fact that I was making highly charged emotionaltrading decisions. I was floating from one trading system to another. I had no planof attack.
Fortunately, it was this frustrating ‘experience that became the driving force behindmy desire to create a well-thought-out trading plan.
Tam excited to say that what I have learned with Fibonacci analysis over the yearshas become my “holy grail.” With this methodology, I have a plan of attack beforeeach market day’s open and can execute every trade with confidence. Sure I havelosses and draw downs like every trader. But I have the confidence that over a rea-sonable sample size, I will be profitable.
So, when I was approached about writing a book on the trading strategies I use withFibonacci, I was, naturally, excited. It is my honor to share with you the fruits of mylabor. The information I’m about to share with you is extremely exciting to me.
 a
2 Introduction
Not a trading day goes by that I am not applying Fibonaccianalysis to the markets and, in turn, watching markets con-form to my Fibonacci work.
Now, let's take a peek at a few examples of Fibonacci at work and the potential de-cision-making power that Fibonacci puts in the hands of a trader. Don’t get caughtup in the specifics or math of these charts, for now. Y'll take a couple of chapterslater on to walk you through those details. For now, just observe some of the oppor-tunities this analysis presents on a daily basis.
  
Introduction 3
 
Fibonacci alerts us to apotential reversal.
 
65.861 Ret 2.519
b3:86d BB SHS
 
oe
    
    
4 Introduction
Over the next couple of months, the BBH traded up over 27 points or 42%. Not badfor a market that had essentially been trending down for the last two years.
 
90. 39,130 89,950 -2.750 el22Augd293.000, 27.60042.20%30TD+
110.000
30 days later, theBBH is up 42%.
65,961 Ret 2.61864.321 Exp 1.618nn 62.800 APP 1,000
69,868 Bpp aide
 
 
+1ssTD.-53,609%65.400, -75.550lo?
 
As the next example will show, Fibonacci also alerts us to where price will likely re-verse to the downside, creating opportunity to profit by selling short a stock, future,
or commodity.
aIntroduction 5
Below is a chart of Myriad Genetics (MYGN). Over the course of five weeks, thisstock had rallied from a low of $16.00 per share to a high on August 15, 2002, of26.20. That’s a 64% upside move. At the $26 level, Fibonacci alerted us to the proba-bility of a reversal to the downside. Not only were we looking for a reversal to thedownside, but Fibonacci ratios had calculated a final Price objective down around$13.22. I knew Fibonacci analysis was accurate, but this seemed like an aggressivetarget.
 
 
 
Fibonacci projects a 25898 Ret 1.27228.376 Ret 0.382
potential downside 28.000 Exp 1.000reversal.
26.808 App 1.61826.450 App 1,000
Objective —---.. FS 1.276 et 1.272
 Introduction
As you can see below, the accuracy of this analysis can be downright scary. Not onlydid MYGN reverse and go down when Fibonacci told us it would, but within a fewshort weeks it actually hit our profit objective. Who would have imagined that astock that was up 63% trading at $26 would be trading at half of that value in just afew short weeks? I guess Fibonacci did!
ea Teel 1600 15.190 18300 aa15Augd226.20063.75%.2sTD
ee 28.898 Ret 1.272
 
 
28.376 Ret 0.38223,000 Exp 1,009
27,399 Ret 1.618
26.808 App L61826.450 App 1.000
 
 
 
 
MYGN losesnearly 50% of itsvalue in 5 weeks.
  
Introduction 7
I’ve shown you a couple of examples on daily charts. It has been my experience andobservation that the exact Same analysis can be applied to almost any time frame aslong as sufficient volume and data exists to create a Measurable price bar. Below weare looking at a 60-minute chart of eBay (each bar represents 60 minutes of price ac-
90.330 50.750 51
        
 
20 13:3054,700, -3.61076.1996
22 Bars
+
    
  
Fibonacci Projectsan opportunity togo long.
            
20:84 Bet 4.272
49.943 Ret 1.618 0.00049,832 App 1.619
OT 49.685 Ret 1.618
49.367 Ret 1.618
  
 
 
         
t24 Bars-8.18% 49.00050.224, -4.4767O¢16:00dt aw 3t 4 Oct?m St ‘Sw
Chart created by D: namic Trader (c) 1996-2001
                   
    
   
Introduction
The very next day, over six hours, eBay traded up over 3 points, or 6%. It wouldtake at Jeast three years at your local bank (at 2003 rates) to net those kind of returns
in a savings account.
EBAY60-I _—“02 Tue 15:30 52.390 53,360 52,250 52.450 1.800,
20c13:30 $Oc15:3054.700, -3.610 53.360, 3.1366.1996 6.24%
 
22 Bars 6 Bars+ +
eBay trades upover 3 pointsthe next day.
80:78 Ret 2:818
49,943 Ret 1.61849,822 App 1.618
99685 Ret 1.618
 
 
 
49.367 Ret 1.618
 
t24 Bars+8, 18%50.224, -4.47616:00
 
Trading opportunities like this one and the previous examples exist every day withFibonacci. They exist on weekly, daily, and intraday charts. They occur in stocks,commodities, and futures contracts. And this analysis can be used and applied bydaytraders, swing traders, and long-term traders alike.
I 
oeglgn ue sie
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Introduction 9
I could go on with many more examples to show you how Fibonacci can help youidentify trading opportunities in both stocks and futures and for different timeframes. But instead, for the remainder of this book let me focus on teaching youhow Fibonacci works and how you can apply it to your own trading.
Here is what you will learn as we work together chapter-by-chapter:
Chapter 1: Understanding How Fibonacci Works—In this chapter, I will explainwhat you need to understand about Fibonacci numbers in order to use them as apowerful tool in your trading.
Section I: The Most Important Fibonacci Tools
Chapter 2: How To Find Important Support And Resistance Levels With Fibonacci—Next I will lay the foundation for the rest of the book by teaching you the basicstep-by-step process that is common to all of the strategies that I will be teaching.
Chapter 3: Using FibZones To Identify High-Probability Reversals—You will thenlearn about FibZones. FibZones will provide you with a way of using multipleFibonacci relationships to find reversals that have a higher-than-normal probabilityof occurring.
Section II: My Favorite Fibonacci Strategies
Chapter 4: How To Enter Trends Using The Trend Trigger Strategy—Here, I willteach you one of my favorite Fibonacci trend-following strategies.
Chapter 5: The Reflection Reversal Method—Next, you will learn how repeatingpatterns in price can play a key role in helping you to identify the most powerful re-versals.
Chapter 6: Trading Pullbacks Using The Triple Crown Strategy—This is my favoritepullback strategy. I will show you how, through the use of certain Fibonacci ratiosand certain swing patterns, you can find excellent pullback trades at the beginningof a reversal or within a strong trend.
Chapter 7: Two-Step Patterns (TSP)—In this chapter I will teach you three variationson what I call “Two-Step Patterns.” These three patterns will enable you to capturestrong trends, enter the initial pullbacks of newly formed trends and trade major re-versals in all time frames.
Chapter 8: Heisenberg 200—In this strategy, I will teach you how to determine whena violation of the widely watched 200-day moving average is likely a fake-out. I willteach you how to use Fibonacci in order to enter the powerful reversals that occurfrom these fake-out moves.
    
 
 
Introduction
10
Chapter 9: Shark Attack—The next strategy V'll teach you is a special variation ondouble-top and double-bottom patterns. By using Fibonacci Extensions, you will beable to identify major reversals that occur off the second bottom (or top) of this pat-tern.
Chapter 10: Air Pockets—In this strategy, 1 will show you how to trade momentummoves that occur when a Fibonacci support or resistance zone is violated.
Section III: It Boils Down To Proper Execution
Chapter 11: Entry Patterns: How To Enter The Trade—In this chapter, I will focus onteaching you the best patterns to use in order to trigger entries into trades. These en-try patterns can then be applied to any of the strategies that I teach you in this book.
Chapter 12: Risk Management: Identifying And Managing The Key Areas Of RiskControl—Finally, I'll wrap up by teaching you the most important principles thatenable you to achieve long-term trading success.
Now let’s get started! 
CHAPTER 1
UNDERSTANDING HOWFIBONACCI WORKS
  
  
 
The Fibonacci numbers Series and its unique properties was first written about by amathematician named Leonardo de Pisa de F
ibonacci (1170-1240).The series starts like this:
112358130134 55__g9 ee-+.and goes on from there.
get the next number in the series. Asyou can see, this series goes on forever. What is fascinating about this number seriesi t is found when a number in the series is divided by the precedingnumber in the string (e.g., 8/5 or 55/34). This ratio, no matter where you go in thesummation series, is right around 1.618.
Over the years, this ratio, 1.618, has been mentioned in writings, essays, and
speeches by some of the Sreatest minds in science and mathematics. Why? Becauseit is found in the structure of a universal assortment of phenomena in the physicalworld. This includes nature, architecture, geometry, music, our DNA, and most rele-vant to us . . . the financial markets.
By understanding this structure, you can identify
where the emotional shifts be-tween euphoria and Pessimism in the markets will c
‘ome.
That, in turn, can be used by you to identify trading opportunities,
THE KEY FIBONACCT RATIOS TO USE IN YOUR TRADING
In the next chapter, I will teach you how to useand resistance levels, [ will show you how Fibcalculations to make these Kinds of projections.to use? Here they are.
Fibonacci to find important supportonacci numbers are used in specificWhat are the best Fibonacci numbers
The basic Fibonacci ratios I use are 1.618 and .618.
ee
                            
14
 
Chapter 1
Besides these two numbers, other derivative ratios that I use in trading are:382 = .618 squared. Also, the ratio between alternate numbersin the Fibonacci sequence is 2.618 or its inverse, 0.382500 = divide the 2nd number by the 3rd in the Fibonacci sequence.786 = square root of .6181.000 = 1.618 x .618 (also used simply for symmetry measurements)1.272 = square root of 1.618
2.618 = 1.618 squared
We will soon discuss the specific ways in which these ratios are used. The importantpoint here is to know which ratios are used and how they are derived. At this point,you should have at least a basic understanding of the background of Fibonacci andthe ratios we'll be using. If you are interested in furthering your education in thehistory of the Golden Mean or Fibonacci, all you need is a computer and Internetconnection. There are thousands of articles and materials on the subject. Have fun!_——
SECTION I
THE MOST IMPORTANTFIBONACCI TOOLS
  
CHAPTER 2
HOW TO FIND IMPORTANTSUPPORT AND RESISTANCELEVELS WITH FIBONACCI
 When you have completed this chapter, you will be able to look at a chart, identify keyhighs and lows, and calculate Fibonacci Price levels. You will also be able to identify aFibZone which is simply my term for a combination of at least three Fibonacci price lev-els within a relatively tight range. This concept will be the backbone of the rest of thebook and will enable you to perform the following Fibonacci price studies, the basic buildingblocks of all the strategies that I will be teaching you.
  
 
   
RETRACEMENTS
 
 
 
 LL
20 Chapter 2
Before we can even think about calculating Fibonacci price support and resistancelevels, we must learn to identify key swing points. Swing points are low or highpoints on a chart where price reverses direction. These are the key points used tocalculate Fibonacci price levels. Rather than getting into a highly technical discus-sion of swing points, I am going to provide general guidelines to be followed inchoosing these swing levels.
 
A swing high occurswhen the current highhas a lower high beforeand after it.
 
A swing low occurswhen the current lowhas a higher low beforeand after it.
      
How To Find Important Support And Resistance Levels With Fibonacci
Use This One
   
  
Question: What if there are multiplelows (or highs) relatively close to theSame price due to a priceconsolidation range? Do [ use all ofthem to calculate Fibonacci levels?
              
| Not This One
 
 
  
Answer: NoFor swing lows, if the lows are
furthest to the right in theconsolidation area.
 
For swing highs, if the highs are
furthest to the right in theconsolidation area.
relatively close in price, use the low
relatively close in price, use the high
21
        
            
                                   
Chapter 2
            
valid to use?
Question: When is a swing point not
 
Answer:
When calculating support, a swing /ow is notvalid when there is a lower swing low to theright of it.
When calculating resistance, a swing high isnot valid when there is a higher swing highto the right of it.How To Find Important Support And Resistance Levels With Fibonacci 23
CREATING FIBONACCI LEVELS
Let’s look at a few charts to get a feel for what to look for:
Here are tricky areas
 
 
= valid swing pt.
 
 
 
= invalid swing pt.
 
 
 
                   
In the case of this chart, we are in an uptrend and the stock has just started to makea move to the downside (A) over the last three days. It will be my goal to calculate aprice support zone with enough strength to stop the price action from going downand reverse it back up to continue the trend that has been in place. To do this I needto identify a swing high (A) and multiple swing low points (B). Please note thatwhen we are calculating support levels there is only one swing high and multiple swinglows. This is the exact opposite for finding resistance in a downtrend (one swing lowand multiple swing high points). It is the consolidation areas where swing points aremost difficult to determine. Just apply our general rules discussed earlier.
TS, _ _————— ss es
24 Chapter 2
Below is a stock in a downtrend. Once a swing low (A) is made in a downtrendingstock, I look for swing high points (B) to use along with the current swing low (A).These are the swings to be used to calculate Fibonacci price resistance. In (1) and (2)below, you may ask why I wouldn't use both of those swing points. This was a situ-ation where the swing high points were close in price, so I used the one furthest tothe right on the chart.
 
= valid swing pt.
 
 
= invalid swing pt.
 
 
 
To calculate price resistance zonesfind the last swing low point alongwith multiple swing high points.
 
 
 How To Find Important Support And Resistance Levels With Fibonacci 25
STRATEGY Q&AQuestion: How many swing points do you use to calculate your Fibonacci levels?
Answer: I'll go back as many as eight consecutive swing points. Beyond that itwould be wise to shift to a higher time frame chart to analyze support and resis-tance. So, if you are studying a 30-minute chart and have gone back eight swingpoints, I suggest if you want to go back any further, shift to a daily chart.
Question: Are certain swing points more significant than others?
Answer: If a trend is in progress, I believe there are four swing points that carry themost weight. The first (A) is the swing point that was just made. Second (B) is theswing point made immediately before reversing into the trend that is in place. Thethird and fourth (C, D) are the last two swing points made in the direction of thetrend before forming swing point A (see illustration).
 
      
Rule of Thumb: Step back and look at thewhole chart in a general way. The significantswing points WILL stand out. It’s not rocketscience and should not be a stumbling blockto learning to calculate Fibonacci price levels.The more you do this analysis the quicker youwill be at picking up the swing points andcalculating the price levels.
 
     
 
     
 
 
 
       
 
    
   
Te26 Chapter 2
FIBONACCI PRICE STUDIES
Now that we have established how critical it is to the calculation of Fibonacci pricelevels to identify the key highs and lows on a chart, we can move on to the varioustypes of Fibonacci price studies I use.
There are four types of Fibonacci price studies: retracements, extensions, projections,and expansions. Do not get hung up on the terminology as we will define each ofthese graphically to give you a solid visualization of what each means. Through theuse of these four price studies, we will be calculating key areas of price support andresistance.
Retracements
First Jet’s take a look at a picture of a retracement:
RETRACEMENTS
 
A retracement is simply a move in the opposite direction of the current trend. In asense it is “recapturing” a portion of the move that was just made. In the illustra-tions above, the current trend is defined as X:A. When price reverses direction fromA to B, it is “retracing” or recapturing a portion of the move from X to A. TheFibonacci ratios I use to calculate retracement levels are:
.382 , 50, .618, and .786 
27
RETRACEMENTS
B
SUPPORT
 
Retracements can be used to calculate support or resistance. When the move from Xto A is up and price starts to go down (as in Figure 1.1), retracements are used tocalculate support for B. Let’s say X is $10 and A is $30.
First, let’s calculate what the range of X to A is:
Price @ A: $30Price @ X: $10
Range = $20.00Next let’s multiply this range by each Fibonacci ratio:
Ratio Points
0.382 $ 7.640.500 $ 10.000.618 $ 12.36
0.786 $15.72
 
  
 
28 Chapter 2
RESISTANCE
 
Finally, take the number (points) from each ratio and subtract it from A, which is$30.00. This will provide you with Fibonacci retracement levels:
 
FibonacciRetracementRatio Points PLA Levels0.382 $ 7.64 $ 30.00 $ 22.360.500 $ 10.00 $ 30.00 $ 20.000.618 $ 12.36 $ 30.00 $ 17.640.786 $ 15.72 $ 30.00 $ 14.28
So, if I were to ask you for the .618 retracement of swing X:A, the answer would be$17.64. The price levels in the table above represent Fibonacci price support deci-sions. The exact same analysis can be done for Figure 1.2 to calculate retracementlevels acting as resistance. In Figure 1.2, X is 30 and A is 10. This time, instead ofsubtracting from A, we would add to A to determine price resistance levels:
 
FibonacciRetracementRatio Points PLA Levels0.382 $ 7.64 $ 10.00 $ 17.640.500 $ 10.00 $ 10.00 $ 20.000.618 $ 12.36 $ 10.00 $ 22.36
0.786 $ 15.72 $ 10.00 $ 25.72
 
  
How To Find Important Support And Resistance Levels With Fibonacci 29
Let’s look at a couple of charts with retracements at work.
19.463 Ret 0.382
18,710 Ret 9.500
17.957 Ret 9.618 [18
16.885 Ret 0.786 |”
 
 
 
The daily chart of JCOM above put in a key low (X) at 15.52. Over the next 17 trad-ing sessions JCOM traded up to (A) which was a high of 21.90. A reversal to thedownside began. So, as soon as the key high (A) was established (with a lower highon each side), we could calculate the Fibonacci retracement levels that might act assupport and stop the downside movement. Those levels are:
382 = 19.46500 = 18.71618 = 17.95.786 = 16.88
So, if I were to ask you what the .786 retracement of X:A is, you would answer16.88.
                
   
30 Chapter 2
Below is a chart in a downtrend that just put in a swing low (A).
i Rit 0.618
 
 
 
Any time a stock is in a downtrend and has just completed a significant low point(A), we can calculate Fibonacci retracement levels. Again, the goal is to determinehow much the stock will “recapture” of the recent move down and where it has a
likelihood to reverse and go pack down. Based on the move from X to A, the
Fibonacci retracement levels are:
.382 = 49.06500 = 50.20618 = 51.34.786 = 52.95
aHow To Find Important Support And Resistance Levels With Fibonacci 31
Extensions
RESISTANCE /
EXTENSIONS x
i
xSUPPORT
 
An extension is very similar to a retracement., It is “recapturing” a percentage of theprevious move (X:A illustrated above). The difference between a retracement and anextension is that an extension recaptures more than 100% of the previous X:A move.Basically, B will go beyond X. The specific ratios I use for extensions are 1.272 and1.618. Let’s assume X is $20 and A is $30 in Figure 2.1. Below is the process to deter-mine Fibonacci extension levels.
First, let’s calculate what the range of X to A is:
Price @ A: $30Price @ X: $20
Range = $10.00Next let’s multiply this range by each Fibonacci ratio:
Ratio Points1,272 $ 12.721.618 $ 16.18
 Chapter 2
XSUPPORT
 
   
B
EXTENSIONS x
Finally, take the number from each ratio and subtract it from A, which is $30.00.This will provide you with Fibonacci extension levels:
 
Fibonacci
ExtensionRatio Points PLA Levels1.272 $12.72 $ 30.00 $ 17.281.618 $ 16.18 $ 30.00 $ 13.82
So, if I were to ask what the 1.272 extension level of swing X:A in Figure 2.1 was,you would answer 17.28. This is a support level. Now we can do the same type ofanalysis to determine resistance. Let’s look at Figure 2.2 where X is 30 and A is 20.Instead of subtracting from A (like in Figure 2.1), we will add to A to determine re-sistance:
 
Fibonacci
ExtensionRatio Points PLA Levels1.272 $12.72 $ 20.00 $ 32.72
   
$ 20.00 $ 36.18a
How To Find Important Support And Resistance Levels With Fibonacci 33
Let’s look at a couple of charts with extensions at work.
 
71.336 Ret 1.272
 
 
 
68,952 Ret 1,616 [69.000
 
The daily chart of IGT above put in a swing low point (X) at 73.21. Over the next 12trading sessions IGT traded up to (A), which was a high of 80.10. A reversal to thedownside began. So, as soon as the swing high (A) was established, we could calculatethe Fibonacci extension levels that might act as support and stop the downside move-ment. Remember, extensions are basically retracements of greater than 100% of the X toA move. The specific ratios we use are 1.272 and 1.618. Those levels came in at:
1.272 = 71.331.618 = 68.95
 
             
SS El34 Chapter 2
Check this out!
71.336 Ret 1.272
 
 
 
 
 
IGT traded down to the 1.272 extension level of swing X:A at 71.33 and did an im-mediate reversal and went up over 7 points in eight trading sessions.
  
How To Find Important Support And Resistance Levels With Fibonacci 35
Here is the same stock from a different perspective.