Zone #2.
4. As Price trades down, the ADX drops below 20. Price moves down to theFibZone and Pushes through and a Possible short entry is made just below78.06.
5. A stop is Placed above the Previous bar high around 79,50,
6. Three hours later, price hits the objective around 75.45,
 
 a
176 Chapter 10
CONTINUATION AIR POCKETS (CAPS)
Air Pockets exist regardless of trend, but the most profitable and consistent AirPockets I’ve found are either in the Reversal Air Pocket (RAPS) strategy or in thisContinuation Air Pocket (CAPS) strategy. The difference between the two is quitesimple. In the case of a short trade CAPS setup, I want to see price in a downtrendas it comes into the first Support FibZone. For long trades, I want to see price al-ready in an uptrend as it hits our first Resistance FibZone. I will also specify theADX requirements for each setup as we dig in. For the most part, it’s a matter ofwhere price was coming from prior to hitting the FibZones that determines whetherit’s a reversal or continuation Air Pocket.
 reer ee rere rereAir Pockets 177
 
PRICE IN DOWN TREND | f=
Example #1 Momentum TradeResistance FibZone OpportunityFailure
 
Example #2Resistance FibZone Momentum TradeFailure Opportunity
 
 
  
 
 
178 Chapter 10
          
Resistance MomentumFibZone Trade
Failure Opportunity
(5) --¥
<--frend Is Up
 
 
Rules For Buys (Shorts Are Reversed):
1. Price has been trending up and has just established a high point where the14-period ADX is greater than 20. With the Reversal Air Pockets, this wouldbe where we calculate Fibonacci price support levels. Not here. In this situa-tion we wait for price to trade down and make a low point and start to rallyagain. Now we calculate Fibonacci price resistance levels from point (2).
2. After calculating Fibonacci price resistance levels, two Resistance FibZonesare identified. FibZone #1 is closest to current price.
3. There must be a tradable gap “Air Pocket” between the two zones, where noFibonacci price resistance levels exist.
4, Price pushes through the highest level in FibZone #1 as the ADX hasdropped below 20. A long trade can be placed just above FibZone #1 or waitfor price to come back and test FibZone #1.
vl
Initial stop loss orders could be placed below FibZone #1, the current bar (thebar that violates FibZone #1), or previous the bar low.
>
Objective on this trade is up to Resistance FibZone #2.                
Air Pockets 179
 
 
 
r47.000
FIBZONE #2 (6)
146,000
145,000
” i FavaHh i on
42.209 Ret 0.698 | 5 o99
 
 
 
 
44-899 Ret 8.582[41.000| 40.000| lt 39,000| | | 8,00037,000| lsson0}35.0002 16 23 30 “14 21 3 San 1aADK 14,20 Pa aoe “ %,oa Na. KY _i tne SSEMEP EFCC RR ERE a ee a
 
Continuation Air Pockets (CAPS): Long
1. Price establishes a swing high point where the 14-period ADX is above 20.This just means there is at least a moderately strong trend in place.
2. Instead of calculating Fibonacci price support levels, wait for a swing low tobe completed. Now, let’s calculate Fibonacci price resistance levels usingretracements, extensions, projections, and expansions.
3. There are over 2.7 points of “Air Pocket” between FibZone #1 and FibZone#2, which should provide plenty of opportunity if FibZone #1 is violated tothe upside.
4. As price trades back up, the ADX drops below 20. Price moves up to thezone and pushes through and a possible long entry is made just above 43.10.
5. A stop is placed around $40, which is the previous bar’s low.. Our objective is hit the same day we are filled for a 2.7 point gain.
                                    
180
 
Chapter 10
—
FBIONE aL ABE Bah 4.2288,268 Ret 2.638ar pocket (3)
FIBZONE #1 19.106 Ret 1.618 119,
 
wr" ”
RD ey WS nS ee 37 Aug “1017 ‘24Dx 14,20
 
 
 
Continuation Air Pockets (CAPS): Long
1, Price establishes a swing high point where the 14-period ADX is above 20.This just means there is at least a moderately strong trend in place.
2. Instead of calculating Fibonacci price support levels, wait for a swing low tobe completed. Now, let’s calculate Fibonacci price resistance levels usingretracements, extensions, projections, and expansions.
3. There are over 1.5 points of “Air Pocket” between FibZone #1 and FibZone#2, which should provide plenty of opportunity if FibZone #1 is violated tothe upside.
4. ADX drops below 20. Price moves up to the zone and pushes through and apossible long entry is made just above 19.10.
5. A stop is placed just under FibZone #1 around 17.85.
6. The first day was a large thrust above the zone, then a couple days of consol-idation and a final thrust to hit our objective. I really don’t like to see muchtime go by where price goes sideways, two or three bars at most, before Istart to consider cashing in and moving on.
a 
  
FIBZONE #2
   
 
(3) aR PocketFIBZONE #1
 
 
 
 
 
Continuation Air Pockets (CAPS): Long
1,
Price establishes a swing high point where the 14-period ADX is above 20.This just means there is at least a moderately strong trend in place.
Instead of calculating Fibonacci price support levels, wait for a swing low tobe completed. Now, let’s calculate Fibonacci price resistance levels usingretracements, extensions, projections, and expansions.
There are over $.60 of “Air Pocket” between FibZone #1 and FibZone #2,which should provide Opportunity if FibZone #1 is violated to the upside.
As price trades back up, the ADX drops below 20. Price moves up to thezone and pushes through and a possible long entry is made just above 29.18,
A stop is placed just below $28.00, which is the previous bar’s low.
Although the size of the profit potential is not fantastic, it is a setup thatseems to hit with a very high accuracy rate.
OT oooouououauai
         
                            
182
Chapter 10
 
~~. Trend Is Down
(5) ~~~»
 
 
Momentum
Support (3) Air Pocket Trade
FibZoneFailure (4)
Opportunity
11\'i‘'4411111'
 
 
Rules For Shorts (Buys Are Reversed):
1. Price has been trending down and has just established a low point where the14-period ADX is greater than 20. With the Reversal Air Pockets, this wouldbe where we calculate Fibonacci price resistance levels. Not here. In this situ-ation we wait for price to trade up and make a high point and start to declineagain. As we start to decline again, it is time to calculate Fibonacci price sup-port levels from point (2).
2. After calculating Fibonacci price support levels, two Support FibZones are
identified. FibZone #1 is closest to current price.
3. There must be a tradable gap “Air Pocket” between the two zones where no
Fibonacci price support levels exist.
4. Price pushes through the lowest level in FibZone #1 as the ADX has dropped
below 20. A short trade can be placed just below FibZone #1 or wait for priceto come back and test FibZone #1.
5. Initial stop loss orders could be placed above FibZone #1, the current bar
high (the bar that violates FibZone #1), or the prior the bar high.. Objective on this trade is down to Support FibZone #2.  
air pocket (3)
   
68,007 Ret 1.272 }ea.
 
 
 
 
Continuation Air Pockets (CAPS): Short
1,
Price establishes a swing low point where the 14-period ADX is above 20,This just means there is at least a moderately strong trend in place.
Instead of calculating Fibonacci price resistance levels, wait for a swing highto be completed. Now, let’s calculate Fibonacci price support levels usingretracements, extensions, projections, and expansions.
There are over 2.7 points of “Air Pocket” between FibZone #1 and FibZone#2, which should provide a very nice opportunity if FibZone #1 is violated tothe downside.
As price trades back down from point (2), the ADX drops below 20. Pricemoves down and through FibZone #1 and a possible short entry is made justbelow 70.73.
. A stop is placed just above $74, which is the previous bar’s high.
These are the nice juicy setups. The same day this short is triggered, we haveclosed out the position for a possible 2.7 point gain.
ooo
    
44,589 Exp 1.61898:589 Ret 1:598 }44.000
43,500 Exp 2.000
 
 
 
 
Continuation Air Pockets (CAPS): ShortL
Price establishes a swing low point where the 14-period ADX is above 20.This just means there is at least a moderately strong trend in place.
. Instead of calculating Fibonacci price resistance levels, wait for a swing high
to be completed. Now, let’s calculate Fibonacci price support levels usingretracements, extensions, projections, and expansions.
There are over 1.7 points of “Air Pocket” between FibZone #1 and FibZone#2, which should provide a short opportunity if FibZone #1 is violated to thedownside.
As price trades back down from point (2), the ADX drops below 20. Pricemoves down and through FibZone #1 and a possible short entry is made justbelow 46.35.
A stop is placed around $49, which is the previous bar’s high.
This strategy is more powerful when there has been a previous test ofFibZone #1, as seen above. By testing the zone prior to violating, it givesmore reason for sell off upon violation. Same day profit of 1.7 points.
                                              
aAir Pockets 185
 
 
 
 
 
 
Continuation Air Pockets (CAPS): Short
1. Price establishes a swing low point where the 14period ADX is above 20.This just means there is at least a moderately strong trend in place.
2. Instead of calculating Fibonacci price resistance levels, wait for a swing highto be completed. Now, let’s calculate Fibonacci price support levels usingretracements, extensions, projections, and expansions.
3. There are over 14 points of “Air Pocket” between FibZone #1 and FibZone
#2, which should provide a short opportunity if FibZone #1 is violated to thedownside.
4. As price trades back down from point (2), the ADX drops below 20. Price
moves down and through FibZone #1 and a possible short entry is made justbelow 52.28.
5. A stop is placed just above $54, which is the previous bar's high.
6. Two days later the potential to take 1.7 points of profits off the table is avail-able.a186 Chapter 10
STRATEGY Q&A
Question: Why use the ADX with these Air Pockets?
Answer: First of all, its good to understand the different readings of the ADX. I havelearned to look at the ADX this way:
0-15 Non-trending market
16-20 New trend gaining strength
21-40 Trend strength in full swing
>40 Extreme levels of strength likely to reverse down soon
So, I chose to use 20 as my focus ADX number. An Air Pocket mixed with a readingthat has crossed from above 20 to below 20 signifies a reversal that might be in theworks. At the least, the chart will be in non-trending mode. So, with this under-standing of the ADX and price violating a FibZone at the same time creates nice Re-versal Air Pockets (RAPS). Now, to completely focus on reversal trading is probablya loser’s game. You need an arsenal of tools that will help you find trend continua-tion trades. The Continuation Air Pockets (CAPS) are perfect for this. As an ADX es- |tablishes itself above the 20 level then falls slightly below it, it is creating a little“trap,” in my opinion. See, the trend may be taking its time and resting for a whilealong the way. That puts traders to sleep. So, when you have a trend in place and alittle ADX trap (above/below 20 shake out) then price action resumes its trend, itcan create powerful trading opportunities. Bottom line: ADX is a great filter for AirPocket setups.
Question: Do any price levels have to be deleted to create an Air Pocket?
Answer: Yes. If you remember a FibZone is only valid if there are three price levelscoming together in a relatively tight range. So, if there are two FibZones nicely de-fined and between those two FibZones sits one Fibonacci price level all by itself, 1will delete that price level and a clear Air Pocket will be identified. Even if twoprice levels are floating between FibZones I will delete them. Why? Because weneed three. Three is the magic number for a FibZone.
Question: What time frame(s) work best with this strategy?
Answer: The lowest I will go is a 60-minute chart and the highest is a weekly chart.My sweet spot is the daily time frame. It creates Air Pockets anywhere between 1and 10 points, while anything below 60 typically creates pennies of Air Pocket op-portunity.
 Air Pockets 187
Question: You mention that there are three places to consider placing stops; (in the case of along setup) below the current bar low (the bar triggered into the long trade), below the previ-ous bar low, or below FibZone #1. How do I know which one to use?
Answer: Stop placement involves thinking through a couple of things. First, identify-ing how much of the Air Pocket profit potential is between FibZone #1 and FibZone#2. Second, knowing how much you can risk in a trade. So, ina situation where theAir Pocket only presents the potential for 1 point of profit, by placing my stop be-low the previous bar low I will expose myself to 3 points of risk. Consistently putting
oser’s game. So, the placement of the stop must be
f
 | SECTION III
| IT BOILS DOWN TO| PROPER EXECUTION
 paar mang
———
A temptation that many Fibonacci traders succumb to is to enter a trade when aFibonacci strategy merely indicates the possibility of a tradable move. That is not properexecution. To trade Fibonacci successfully and gain consistent results, you must makesure that you observe price action that confirms that a tradable move is occurring. Thenand only then, can you enter a trade. In this chapter, the topic of entering trades will be ourmain focus and I will teach you the best entry methods that I have found.
The best approach that I have found for entering trades is to do the following afteryou have identified a trading setup:
Find a trigger pattern in a lower time frame.
For example, if a setup is occurring on a daily chart, I will drill down to a 60-minuteor 30-minute chart to look for triggers.
What Chart Time Frame Should I Be Looking For a Trigger?
Setup Occurs _ Look for triggers on
 
Weekly Daily and 60-minute chartDaily 60- and 30-minute chart30 13- and 8-minute chart
13 5-minute chart
Trigger Patterns That I Use
Now that we've established the time frames to look at to be triggered into trades,let’s look at the types of triggers I use.
Trigger list:
1. CandlesticksDojiMorning Doji StarEvening Doji StarMorning StarEvening StarShooting StarBearish 3 MethodBullish 3 MethodHanging Man
193
 
 
                             
Te194 Chapter 11
Tweezer BottomsTweezer TopsBearish EngulfingBullish Engulfing
In addition to Candlesticks, I also use more complex patterns on lower time framesafter identifying a potential trade on a higher time frame. Some of these patternswill sound familiar because they are trading strategies that I taught you in earlierchapters. However, they are highly useful as entry triggers in lower time frames. |will give you clear illustrations of this concept later in this chapter.
2. Two-Step Patterns
Symmetrical TSPGartley TSPButterfly TSP
3. Old School Patterns:
Double Top
Double Bottom
Head & ShouldersReverse Head & Shoulders   
   
Entry Patterns: How To Enter The Trade
MY FAVORITE CANDLESTICK ENTRY PATTERNS
Introduction
Japanese rice traders developed candlesticks centuries ago to visually display priceactivity over a defined trading period. Each candlestick represents the trading activ-ity for one period. The lines of a candlestick represent the open, high, low and closefor that particular period.
The main body (the wide part) of the candlestick represents the range between theopening and closing price. If the closing price is greater than the opening price, themain body is white. If the closing price is less than the opening price the main bodyis black. The lines coming out of each end represent the highest high and lowest lowof that particular period and are commonly referred to as wicks, shadows, or tails.
One can use candlestick patterns as a trigger to enter a trade on the same time framethe setup occurs, or drill down to the appropriate time frame mentioned on the pre-vious page, based on the time frame of the setup.
HIGH HIGH
OPEN CLOSE
 
CLOSE OPEN
LOW LOW
Now, let’s run through the basic candlestick patterns I look for to trigger me into atrade.             
196
 
Chapter 11
Entry Patterns
Below are graphic representations of each candlestick pattern I look for:
"
Bearish 3 Method: A long black body followed by a few small bodies and ending inanother long black body. The small bodies are usually contained within the firstblack body’s range. This is a bearish continuation pattern.
My
Bullish 3 Method: A long white body followed by a few small bodies and ending inanother long white body. The small bodies are usually contained within the firstwhite body’s range. This is a bullish continuation pattern.
 
 
 
  
Entry Patterns: How To Enter The Trade 197
Doji: The open and close are the same so no “body” exists on this candle. This can-dle assumes longer-term significance the longer the vertical lines above and/or be-low the open and close horizontal line. Typically the doji represents indecisionbetween buyers and sellers and a high likelihood for reversal exists after this candle-
stick is complete.
Bearish Engulfing: A small white body followed by and contained within a largerdark body candlestick. This is a top reversal pattern and typically leads to an initia-tion of a sell off.
f
Bullish Engulfing: A small dark body followed by and contained within a largerwhite body candlestick. This is a bottom reversal pattern and typically leads to aninitiation of a rally.
eee
  
198 Chapter 11
Evening Star: a large white body followed by a small body that gaps above thewhite body. The third candlestick is a black body that closes 50% or more into thewhite body. This is a top reversing pattern
fl
Morning Star: a large dark body followed by a small body that gaps below the darkbody. The third candlestick is a white body that closes 50% or more into the darkbody. This is a bottom reversing pattern.
Hanging Man: Small body near the high with a long lower tail with little or no up-per tail. This is a bearish pattern during an uptrend.
  
 
Entry Patterns: How To Enter The Trade 199
Shooting Star: A candlestick with a small body at or around the low with a long up-per tail and little or no lower tail. This is a bearish pattern in an uptrend.
Morning Doji Star: A large dark body followed by a doji that gaps down below theblack candle. The next candlestick is a white candle that closes at least 50% into thedark candle. This is a bottom reversing pattern.
|
Evening Doji Star: A large white body followed by a doji that gaps up above thewhite candle. The next candlestick is a dark candle that closes at least 50% into thewhite candle. This is a top reversing pattern.
oooaouoaouaiaiaoiuouoo
 a
 
200 Chapter 11
I
Tweezer Bottom: Two candlesticks with matching bottoms. Ideally, the first candle isa dark candle and the close is at the low, and the second candle is a white candlewith the open at the low. This typically represents a short-term low at the least.
[lo
Tweezer Top: These are two or more candles with similar tops. Ideally, the first can-dle is a white candle and the close is at or near the high. The second candlestickopens at the high and typically has a higher tail and either a dark or white body be-
 
 
i low it. This typically represents a short-term top, at the least.
 eT orp emma
Entry Patterns: How To Enter The Trade 201
The candlestick patterns I’ve shown you speak volumes about market sentiment andshifts in supply and demand of a particular stock, commodity, or futures contract. Ibelieve candlestick-pattern recognition and Fibonacci price analysis is unrivaled intheir combined accuracy to define high-probability trading opportunities. There arecountless software programs available that can scan for candlestick patterns of theentire universe of publicly traded securities in seconds, and kick out results of allthe charts that possess any one of the candlestick patterns I’ve mentioned in thischapter. My favorite book on this subject is Candlestick Charting Explained by GregoryMorris, if you would like further information on this subject.
Now, let me put these triggers together with trading setups and show you how theyare used. The best way to apply the trigger patterns I’ve shown you involves identi-fying a setup on a certain time frame, and then drilling down to a lower time frameto look for either a candlestick entry pattern by itself or one of the following morecomplex patterns.
Double Tops & Bottoms
Head & Shoulders/Reverse Head & ShouldersGartley TSP
Butterfly TSP
Symmetrical TSP
Shark Attack
A couple of warnings here:
1. If you are looking at a weekly chart setup, remember to only drill down oneor two time frames below the weekly chart to look for triggers. Otherwise, ifyou start trying to look for triggers on a 5-minute chart for that weekly chartsetup, you will likely get whipsawed out of your position quite often. So usethe timetable guide mentioned earlier as a reference when looking for trig-gers.
2. Always be aware of at least one time frame higher than your setup. Highertime frames ALWAYS carry more significance and weight on price move-ment. So, if you have a bearish setup on a 30-minute chart and you are look-ing for triggers to go short on, say, a 13-minute chart, stop looking fortriggers until you have confirmed the larger picture is not setting up in theopposite direction. Always, always, always be aware of the higher time frame,
 
 
 (a
202 Chapter 11
Examples of Triggers on Lower Time Frames
Below we have a daily chart of EBAY. The stock had been in the midst of a signifi-cant sell off for a few weeks as it was approaching one of our Support FibZones. Itwas also completing a Bullish Butterfly TSP into this FibZone. So, when a stock ismoving like a freight train to the downside, we want some kind of confirmation of areversal to the upside. So, I pull out the microscope and drill down into price activ-ity on lower time frames around the area of pattern completion and around ourFibZone.
 
 
A
LET’S DRILL DOWN TO A 13 [62.000MINUTE CHART AND LOOK
AT THIS AREA OF PRICE
ACTIVITY FOR A TRIGGER
Bullish Butterfly TSP6M Ret 1.272
ag Ret 1:88
49,367 Ret 1.61348.940 App 1.000
48.415 Exp 0.618
   
Entry Patterns: How To Enter The Trade
  
 
F-Oct-02 Mon 15:47 _ 50270 50,780 0200. S060
   
ao
 
2
   
SHARK ATTACK PATTERN
         
itNW | 50.287 Ret 1.272Tweezer Bottom & Bullish 3Engulfing Pattern a.000ca Oct?m St
Chart created by Dynamic Trader (c) 1996-2001
There are two triggers on this 13-minute chart of EBAY.
to take the long trade in EBAY.
A. A Shark Attack Pattern labeled 1, 2, 3. Remember this is where Price extendsto 1.272 or 1.618 of swing 1:2.
B. In fact, at the 1.272 extension of this pattern on the 13-minute chart, EBAYputs in a Tweezer Bottom and Bullish Engulfing Candlestick Pattern. The
combination of these two triggers gives me the confidence to take a longtrade.
The completion of one or both of these patterns would serve as a legitimate trigger
   
   
a IS204 Chapter 11
After seeing two great triggers develop on lower time frames, a long trade is en-tered and the stock trades up over 14 points in 13 trading sessions. Partial profitswould have been taken between the .50 and .618 retracement of Swing C:D. Oncethose profits were booked, I would trail my stop up to at least breakeven. Then myfinal objective on the trade is up at the 1.272 to 1.618 extension of swing C:D.
EBAY D-DEri 25-Oct-2002 61.960 62,150 61.270 62.000 0.000
 
66.770 Ret 1.619
63.231 Ret 1272
56.544 Ret 0.618
$5,337 Ret 0.500
50.960 Ret 1.272
49:343 Ret 161849.367 Ret 1.61843,940 App 1.00048.415 Exp 0.618
 nel
Entry Patterns: How To Enter The Trade 205
Below we have a 30-minute chart of AFFX. It was in the midst of a decent-size rally.However, it was also completing a Shark Attack Pattern on this time frame into aResistance FibZone. With a trend to the upside in place, and a bearish reversal pat-tern unfolding, I wanted to wait for a trigger on a lower time frame to take me intoa short trade. So, once again, I pull out the microscope and drill down into price ac-tivity on lower time frames around the area of pattern completion and around ourFibZone.
                    
 
6-Nov-02 Wed 14:30 27.630 27.830. 27.561 27,830 1,050 -
| 3 27.093 app 0618
L A | 27,752 Ret 1.618WNL sues
 
    
 
  
LET’S DRILL DOWN TO A 13MINUTE CHART AND LOOK AT
THIS AREA OF PRICE 26.000ACTIVITY FOR A TRIGGER.
 
        
    
5t bw 7
Chart created by Dynamic Trader (c} 1996-2001
 
 EEE
a
206 Chapter 11
Once AFFX went up into our FibZone, I pulled up a 13-minute chart and startedlooking for reasons to take a short trade. There was a combination of four candle-sticks on this time frame that caused me to pull the trigger. See below.
AFFX 13-16-Nov-O2 Wed 14:03 "27.709. 27.710. 276Nw13:2427,850, 0,0000.00%0 Bars+
Doji
; Hanging Man
i Two follow through bars
 
| After the candlesticks triggered us in, AFFX does not make a new high and it tradesdown over 6% the next day, or 1.75 points. |
  
 
Entry Patterns: How To Enter The Trade 207
TO REVIEW
 
6.28%26.100, -1,750
ZELe 3S AOofTrader (c) 1996-2001
 
* We found a possible pattern setup on a 30-minute chart.
« Drill down one or two time frames lower for a trigger. A trigger can be anyof the candlesticks or other patterns we mentioned in this book.
* Once the trigger/pattern completes on the lower time frame, enter thetrade.
  
 
el
208 Chapter 11
On June 19, 2002, LPNT is completing a Bearish Gartley TSP Pattern. If you are notinterested in taking the simple trigger, which is entering on a trade below the previ-ous bar’s low after pattern completion, we were able to drill down to a 60- minutechart and identify some reversal candlestick patterns.
 
19Jund2
42,168 Exp 0.618
41,625 Ret 1.618
 
41,1