Here we look to calculate resis-tance extension levels based on swing X:A.
    
81.607 Ret 1.618
     
feos79.812 Rat 1.272
|(hPL E|
 
    
|
62%73.210, -5.190 72.000Nevo
73,000
  
 
tim “at iw “4t "TSF lan It 2ow 2 Satan 28 Ww a
 
The daily chart of (IGT) above put in a swing high (X) at 78.40. Over the next 12trading sessions (IGT) traded down to (A), which was a low of 73.21. A reversal tothe upside began. So, as soon as the low (A) was established, we could calculate theFibonacci extension levels that might act as resistance and stop the upside move-ment. Remember, extensions are basically retracements of greater than 100% of the Xto A move. The specific ratios we use are 1.272 and 1.618. Those levels came in at:
1.272 = 79.811.618 = 81.60
     
36
                                            
 
Chapter 2
Projections
PROJECTIONS
A
BSUPPORT RESISTANCE
 
Now that we’ve covered retracements and extensions, the next Fibonacci study thatL use is called a projection. From the figures above, projections measure the size ofprevious swings (X:A) in the same direction and project those swings from the cur-rent swing beginning at (B). The ratios used in this study are .618, 1.00, and 1.618.
Projections can be used to calculate support or resistance. To calculate a projectionthree points must already be established (X, A, B). For illustration purposes, let’s as-sume X = 40, A = 30, B= 35.
First, let’s calculate what the range of X to A is:Price @ A: $30Price @ X: $40Range = $10Next let’s multiply this range by each Fibonacci ratio:Ratio Points0.618 $ 6.18
1.000 $ 10.001.618 $ 16.18 
How To Find Important Support And Resistance Levels With Fibonacci 37
PROJECTIONSA
“RESISTANCE
SUPPORT
 
Finally, take the number from each ratio and subtract it from B, which is $35.00. Thiswill provide you with Fibonacci projection levels:
 
Fibonacci
ProjectionRatio Points Pt. B Levels0.618 $ 6.18 $ 35.00 $ 28.821.000 $ 10.00 $ 35.00 $ 25.001.618 $ 16.18 $ 35.00 $ 18.82
So, if I were to ask you for the 1.618 projection of swing X:A from B, the answerwould be $18.82. The price levels in the table above represent Fibonacci price sup-port decisions. The exact same analysis can be done for Figure 3.2 to calculate pro-jection levels acting as resistance. In Figure 3.2, X is $30, A is $40, B is $35. This time
instead of subtracting from point B, we would add to B to determine Price resistancelevels:
 
Fibonacci
ProjectionRatio Points PLB Levels0.618 $ 6.16 $ 35.00 $ 41.161.000 $ 10.00 $ 35.00 $ 45.00
1.618 $ 16.18 $ 35.00 $51.18
    
   
Chapter 2
 
463.000,
62,290 App 0.648{ecm
60.720 App 1.000
88 A LEE
 
 
 
 
Above is an example of a price projection on the daily chart of Johnson & Johnson(JNJ). Swing X to A was measured for a total of 4.11 points. This range was multi-plied by our Fibonacci ratios (.618, 1.00, 1.618) and each of the those numbers wherethen subtracted from swing B high of 64.83 to get the following projection support
numbers:
618 = 62.291.000 = 60.721.618 = 58.18How To Find Important Support And Resistance Levels With Fibonacci 39
28.831 App 1.616
— J 21.640 App 1.000
. |
18,10
i
18.431 App 0.816
13.24
 
 
 
Above is an example of a price projection on the daily chart of (QSFT). Swing X to Awas measured for a total of 8.4 points. This range was multiplied by our Fibonacciratios (.618, 1.00, 1.618) and each of the those numbers were then added to swing Blow of 13.24 to get the following projection resistance numbers:
618 = 18.431.000 = 21.641.618 = 26.83
    
    
40 Chapter 2
Expansions
A
. 3SUPPORT RESISTANCE
 
ith one small difference. Instead of
Price expansions are similar to projections wproject the values from A. B is
measuring swing X:A and projecting it from B, wenot used in this study. Basically, expansions measuring swing X:A “expan ” thatswing further in the direction price is headed using the following Fibonacci ratios:618, 1.00, and 1.618. These price levels will be labeled as (Exp) on the charts.
To calculate an expansion only two points must be established (X, A). For illustra-tion purposes, let’s say X is 50 and A is 45 in Figure 4.1.
First, let’s calculate what the range of X to Ais:
Price @ A: $45Price @ X: $50Range = $5.00Next let’s multiply this range by each Fibonacci ratio:Ratio Points0.618 $ 3.09
1.000 $ 5.001.618 $ 8.09
   
A
SUPPORT
How To Find Important Support And Resistance Levels With Fibonacci 41
EXPANSIONS
 
B
RESISTANCE
Finally, take the number from each ratio and subtract it from A, which is $35.00.This will provide you with Fibonacci projection levels:
 
Fibonacci
ExpansionRatio Points Pt A Level0.618 $ 3.09 $ 45.00 $41.911.000 $ 5.00 $ 45.00 $ 40.001.618 $ 8.09 $ 35.00 $ 36.91
So, if I were to ask you for the 0.618 expansion of swing X:A, the answer would be$41.91. The price levels in the table above represent Fibonacci price support deci-sions. The exact same analysis can be done for Figure 4.2 to calculate projection lev-els acting as resistance. In Figure 4.2, X is $30, and A is $40. This time instead ofsubtracting from A we would add to A, to determine price resistance levels:
 
FibonacciExpansionRatio Points PLA Level: 0.618 $ 6.18 $ 40.00 $ 46.181.000 $ 10.00 $ 40.00 $ 50.00: 1.618 $ 16.18 $ 40.00 $ 56.18
   
 
42 Chapter 2
Expansions are a “confirming” Fibonacci study. This simply means that the otherthree studies—retracements, extensions, and projections—should be the first pricestudies applied to a chart. Then utilize this price study to confirm a potential pricesupport or resistance zone.
REVIEWIn this chapter we learned general guidelines on how to spot significant highs and.lows on a chart that will assist us in calculating Fibonacci price support and resis-tance levels.We also learned the specific Fibonacci ratios used in each of the following pricestudies and how to calculate each of these Fibonacci price studies:
¢ Retracements
e Extensions
* Projections
¢ ExpansionsMastering these price studies will be essential to your success with the strategies inthis book. It is imperative to be able to pull up a blank chart and calculate the
Fibonacci price levels. It is through these Fibonacci price studies where areas of con-centrated price levels will begin to appear. Those concentrated zones are the focus of
the next chapter. 
CHAPTER 3
USING FIBZONES TOIDENTIFY HIGH-PROBABILITY REVERSALS
 WHAT IS A FIBZONE?
Now that we have reviewed the variouis time to shift gears from theory into strategy. Almost all of the Strategies I trade arebased on a stock, commodity, or futures contract hitting a Fibonacci price support or
resistance zone. I have coined the phrase “FibZone” to represent these areas. Belowis the definition of a FibZone.
FibZone: A relatively tight range of price where a confluence of any combination ofat least three Fibonacci price retracements, extensions, Projections, or expansions oc-
cur. If a FibZone occurs above the current Price, it is resistance, and if a FibZone isbelow the current price, it is support. I have coined a unique phrase to describe anot-so-unique general concept. What I call a FibZone, others call “confluence,”“price zones,” “clusters,” etc. Later, you will find that I have defined specific typesof FibZones that do carry a unique and different characteristic to the run-of-the-mill“zone.” Below is a perfect example of a Support FibZone.
  
12.658 App 0.618
HES
    
 
                
i
46 Chapter 3
how to build a FibZone. Below is a daily chart ofAOL. Price has just made a swing high point on December 2, 2002. The goal now isFibZones where AOL will likely stop declining
to create one or multiple Supportand reverse up to continue the current uptrend. To do that, the first step is to iden-
tify the key high and low points.
Let’s walk through an example of
STEP #1: Identify Key High and Low Points
 
 
 
 
 
 
 i ee
Using FibZones To Identify High-Probability Reversals 47
Now that the key points are determined, we can begin to apply our Fibonacci pricestudies. The first Fibonacci price study to apply is a retracement. So, let’s measurefrom the July 2002 low to the December 2002 high and calculate the variousretracement levels. If the current price on the chart is already below a retracementlevel, then delete the Fibonacci price level, as it has been “violated” and is no longera valid support level.
STEP #2: Calculate RETRACEMENT levels using swing low pointsidentified in this uptrend and the current swing high point.
13.295 Ret 0.500
12.211 Ret 0.61812
10.667 Ret 0.786
 
 
 
 
(Swing Points: Low = 8.70 High = 17.89)
     
Ds eel48 Chapter 3
This is a continuation of Step #2, as we have a higher swing low point we will useto calculate additional retracement levels using the October 9 low of 10.26 and theDecember 2 high of 17.89. As you can see, there are now a couple of price levelsstarting to group together. A zone is beginning to form.
STEP #2 (cont.): Calculate RETRACEMENT levels using swing lowpoints identified in this uptrend.
14.075 Ret 0.500 L14,00043-298 Rat 8.898
12.211 Ret 0.618
11.999 Ret 0.726 [22000
10.667 Ret 0.786
‘10.000Lo
185 Ret 1.2728.185 Ret 1.27. | econ
 
 
 
(Swing Points: Low = 10.26 High = 17.89)
 
 
  
 
Using FibZones To Identify Hi igh-Probability Reversals 49
Now let’s shift to calculating extension levels. Remember, an extension is simply aretracement greater than 100%. So, with the low point from November 20 at a higherlevel than the current price, I am concerned with the 1.272 and 1.618 extension levelsthat come in at 13.62 and 12.47, respectively. Can you see a zone forming?
STEP #3: Calculate EXTENSION levels using swing low points thatare higher than current price up to the current swing high.
13,629 Ret 1,272
43.293 Ret 8.898 L
¥ W |
12.470 Ret 1.61612.211 Ret 0.619
11,893 Ret 0.78610.667 Ret 0.786
9.120 Ret 2.618
14540 — 8.185 Ret 1,27220Nov02 _
 
 
(Swing Points: Low = 14.54 High = 17.89)
 
  
50 Chapter 3
Now let’s apply a Projection study. In this trend up, there has been one countertrenddecline from August 22 to October 9 that was 4.5 points. Project this decline fromthe current December 2 swing high point of 17.89. This simply means subtract 4.5
points from 17.89 and we have a projection or “symmetry” level at 13.39.
STEP #4: Calculate PROJECTION levels by measuring previous de-clines (in an uptrend) and subtract the size of those declines from the
 
current high point. Opposite for downtrends.
 
 
AOL D-D= "14,050. 14,210. -2.960.22AUg02 2Deco214,600, 0.000 17,990}19.000+b1e.c00}17.000b16.000
15.000‘ |14,075 Ret 0.500 114.000
——_—_—_———— 13.629 Ret 1.272
43.958 REPL ERE
| ,
f i! SS |
py { eet .)
 
 
 
 
 
+10.260, -4.540gocto2
 
T — T am TAug Sep Oct Nov Dec 03
(Swing Points: High: 14.80 Low = 10.26 High = 17.89)
10,667 Ret 0,786
9.120 Ret 2.618
8.195 Ret 1.272
13.000
ponopue.ocor9.000
18.000
 
 Using FibZones To Identify High-Probability Reversals 51
IDENTIFYING A FIBZONE
Here is your new Support FibZone that will be used to look for long trades. Notethat due to the nature of this chart, we did not need to calculate EXPANSION levels.If this study can be performed, it should be done after the retracements, extensions,and projections have been calculated.
You will notice that the range of the FibZone in the chart below is spanning a 2point range. How does this provide you with an edge? The key is to remember thatyou should never trade on the basis of a FibZone alone. You should only tradewhen you have a legitimate entry pattern within the FibZone. This applies no mat-ter how many Fibonacci levels are calculated for a specific price level. I apply sev-eral different entry patterns to the Fibonacci strategies that you will learn in thisbook. I will teach them to you in Chapter 11.
|ss.o00
fie .090
em
 
{> 14.075 Ret 0.500 144 099}- 13.629 Ret 1.272
== Be ee
j- 12.470 Ret 1.619y 12.211 Ret 0.618y 11.893 Ret 0.786
 
 
 
 
 
               
LL52 Chapter 3
Just to play out this example, AOL traded deep into our Support FibZone, but re-versed around 12.20 and rallied up to almost $16.00 over a couple of weeks of activ-ity. This would have been a 27% gain for someone who identified an entry pattern
 
within a Support FibZone.AOLDD ee oe ; i= 15.210.15.240. 0.110153an0315,650, 3.39027 65% |e.000
-se5.000| /Fh :
 
11,899 Ret 0.786 [t2-000
 
th, 12.470 Ret 1.618i 12,211 Ret 9.618
 
 
 
 
 
 Using FibZones To Identify High-Probability Reversals 53
STRATEGY Q&A
Question: Does the size of the FibZone matter?
Answer: To qualify as a zone, it needs at least three Fibonacci price levels. Yes, as thenumber of price levels that occur in a FibZone increase, the more important thatFibZone becomes. I equate it to ripping one piece of paper in half or trying to rip aphone book in half. One page is no problem. But as each additional Page is added tothe stack, it becomes more difficult to tear them in half.
Question: What Fibonacci ratio is the most important in a FibZone?
Answer: A couple of the strategies I discuss have specific ratios that must be present.These are specific types of FibZones. Generally speaking, though, I am not lookingfor a specific ratio. I just want to see a confluence of Fibonacci price levels (I don’tcare which ones) in a relatively tight range.
Question: Which Fibonacci studies are better?
Answer: Well, as you have read, there are four basic Fibonacci studies: Retracements,Extensions, Projections, and Expansions. No study is necessarily better than another.I continue to go back to the focus of the FibZone. A tight price area with a largenumber of price levels Tepresents a trading opportunity.
Question: After running the Fibonacci studies on a chart, do you remove any of theFibonacci levels from the chart?
Answer: Yes. If a price level is hanging out all by itself on the chart with no otherFibonacci levels around it to create a FibZone, then I will delete that Price level. I amsimply looking for groups of Fibonacci ratios concentrated in a small price range.
Question: How big can a FibZone be?
Answer: Depending on the chart, a FibZone can be very wide. However, for tradingpurposes, I try to find charts that provide FibZones that are no more than 10% of thePrice of the security from the low Price to the high price of the zone. Many times thezone is closer to 5% in the width of the price of the stock or commodity. For exam-ple, I wouldn’t want a FibZone on a $40 stock to be much more than 4 points deep.
   
   
a54 Chapter 3
Question: Sometimes there is more than one zone after running these studies. So, how doyou decide which one to trade against?
Answer: FibZones simply provide decision points in a particular market. A decisionpoint, that’s it. Fibonacci, by definition, is a tool that assists the trader in findingsupport and resistance levels. So, the key to knowing what zone to trade againstwill be based on what you use for a “trigger.” After those decision zones are on thechart, it is necessary to have certain patterns, indicators, oscillators, etc., that youwill use to determine the internals of the market you are looking at and when to ac-tually take a trade. That will be the focus of most of the rest of this book.
Question: What software programs do you recommend using to calculate these FibZones?
Answer: There seems to be a new software program coming out every day to ad-dress Fibonacci. J personally use Dynamic Trader. I believe it is the most comprehen-sive Fibonacci tool on the market right now. Whatever program you consider, Ithink you need to be able to delete lines/price levels that you don’t need, be able todo each study we mentioned earlier, and manipulate the chart with relative ease, aswell as perform other technical studies, and the ability to make notes on the charts. Ipersonally also require a program that allows me to convert a bar chart tocandlesticks.
Question: When is a zone recalculated?
Answer: In an uptrend, a new support zone is calculated when the current high isviolated and a new high point is made. In a downtrend, a new resistance zone iscalculated when the current swing low point is violated and a new lower low pointis made. Remember, a high point is confirmed when a lower high is made on eachside of the high, and a low point is confirmed when a higher low is made on eachside.SECTION II
MY FAVORITEFIBONACCI STRATEGIES
  
 
  
SPECIAL NOTE BEFORE I TEACH YOU MYFIBONACCI TRADING STRATEGIES
Before 1 begin teaching you my trading strategies in the following chapters, I want to
state emphatically that you must always wait for confirmation before taking a trade.That means you wait for a tri i
strategies we'll be discussing involve a stock hitting a FibZone, and it is in the price ac-tion against this FibZone where I look for entries.
After we walk through all the strategies, I will follow
up with a discussion and listof the pattern trigge
rs I use to enter trades in Chapter 11.For the purposes of this book, please make these two assumptions:1. Always use a pattern or some other form of trigger to enter a trade.
2. Whenever I refer to entries as I teach you my strategies, I am referring to oneof the patterns in Chapter 11. 
 
CHAPTER 4
HOW TO ENTER TRENDSUSING THE TRENDTRIGGER STRATEGY
 STRATEGY #1: TREND TRIGGER
Trend Trigger is probably the simplest way to trade with FibZones. The basic as-sumption here is that we are trading with the trend and that a normal and naturalpullback is occurring, and this pullback will stop somewhere in our FibZone and re-verse direction.
  
 
How To Enter Trends Using The Trend Trigger Strategy 61
Rules For Buys (Sells Are Reversed)
1.
There must be at least two higher swing high points and at least one higherswing low point. This structurally confirms we are trading with the immedi-ate trend.
The current bar low must at least touch the top of the FibZone. At this point,look for an entry pattern to get you into the trade.
Once you are filled, a stop loss order should be placed just below theFibZone. This assumes your money management rules will allow you to riskthe entire zone. If not, do not take the trade until price drops deep enoughinto the zone to meet your money management stop loss rules, or reduce thenumber of shares or contracts to be purchased.
Once a swing low point is determined against the FibZone, calculate the .50,618, and 1.272 extension of the high-to-low swing into the Support FibZone.These levels will serve as profit objectives.
. The first profit-taking area is between the .50 and .618 retracement range.
Once these profits are booked, trail your stop loss to reduce risk.
. The final objective of a Trend Trigger trade is the 1.272 extension of thehigh-to-low swing made into our FibZone.
  
    
40.227 Ret 1.638
 
  
36.007 Ret 0.766,
 
 
 
 
  
32.516 Ret 0.3822s Ret 0500
 
 
 
                   
 
3.100 sepa se
 
 
Trend Trigger Example: Longswing low point.
T use.
3. The initial stop is placed just below the zone around 31.00.
the high-to-low swing into support.
breakeven.
high-to-low swing into the Support FibZone.
3B.476 Ret 127238.
31,794 Ret 0.382 |"
 
(4)
1. We have identified two higher swing high points with at least one higher
2. Price touches the Support FibZone, and I’m long at 32.60 based on the trigger
4. With a swing low in place, we calculate the .50 and .618 retracement levels of
5. Profits are taken on half the position between 34.57 and 35.16, which are the50 and .618 retracement levels. At this point, I also move my stop to
6. The final objective on the trade is 38.47, which is the 1.272 extension of the 
 
 
How To Enter Trends Using The Trend Trigger Strategy 63
 
26,050 Rat 1.272
25.956 Ret 0.638, NS
 
 
 
Trend Trigger Example: Long
1.2.
We identify two higher swing high points and a higher swing low point.After making a swing high, price comes down and touches our zone at 24.63,which is where we take a long position.
Our initial stop loss order is placed just below the zone around 23.80.
Price goes lower into the zone over the next couple of days, then reverses upout of the FibZone. We calculate the .50 and .618 retracement of thehigh-to-low swing into support.
I take partial profits between 25.57 and 26.00 and immediately trail my stopto reduce risk.
. The final objective, which is the 1.272 extension of the high-to-low swing into
support, is hit and I take the last portion of the long off around 28.06.
     
How To Enter Trends Using The Trend Trigger Strategy 65
[950.09941,79 Ret 0.618
938,96 Ret 0.616 fs+0.00357.58 Ape 1000
—=—===_—*-(2)—_— S38 Ba pase
330.25 App 1.000 Lean ng
539-88 Ret 0.383
| | i |‘i ! i | “pooam
 
 
 
 
( ) 1900.00997.59 Ret 1.2721630.001280.007: * =2 "Aug2im a ow 2m oF ‘SepChart created by Dynamic Trader (c} 1996-2001 J
 
Trend Trigger Example: Short
1.
Two lower swing lows and at least one lower swing high have been identi-fied. Once the second swing low is made, we can calculate price resistance.That zone comes in from 927.50~941.75.
Price rallies up and touches the Resistance FibZone, so I go short at 927.50.My stop is at 942.00. That’s 14.5 points of risk.
Once a swing high is made into the FibZone, we can calculate the 50 and618 retracement of the low-to-high swing into our Resistance FibZone. Theseprice levels are 916.50 and 913.50.
Price hits our first target and half the position is taken off around 916.00. Mystop is moved down to breakeven (especially on intraday trades).
. The final objective at the 1.272 extension of the low-to-high swing into resis-tance is hit at 897.50.
                            
  
LL66 Chapter 4
STRATEGY Q&A
Question: What if a Trend Trigger trade comes up and the FibZone is too large and I amunable to put a stop below the FibZone and risk that much?
Answer: Don’t take the trade until the stock drops lower into the FibZone (forlongs). If your money management rules don’t allow you to take the trade, thenplease don’t take it. Risking too much on one trade will come back to haunt you.The other choice is to still take the trade, but trade fewer shares or contracts to keepyour risk in line with your money management rules.
Question: Where do you place the stop after hitting the first objective?
Answer: Ideally a stop can be placed at your original entry price so that risk can becompletely eliminated from the trade. However, there are situations where movingthe stops to that level will get you prematurely stopped out of the trade. Be awareof the volatility of the stock, and avoid placing stops at round numbers or levels tooclose to the current market price.
Question: How long do you typically hold these trades?
Answer: That is always dictated by the market. It has been my observation that thebest trades bounce immediately out of a FibZone and become profitable quickly. If Ifind myself looking at a chart where price has hit our zone and it continues to printbars that hover around the FibZone, then I often scratch the trade.
Question: Are there any confirming indicators to use with this strategy?
Answer: By definition, this is supposed to be a “trend following” strategy. We aretrying to identify pullbacks into FibZones. So, the stronger the trend, the better theopportunity. I’ve found that a strong ADX reading is an excellent scanning tool, aswell as a nice confirming indicator. I would use a 14-period ADX of 20 or greater.Ideally, the ADX line is upsloping and not downsloping. This just means the readingis continuing to go higher and the trend is getting stronger. Downsloping means thetrend is losing strength. 
 
 
 
CHAPTER 5
THE REFLECTIONREVERSAL METHOD
                         