Class 1: Intro to Fibs

Today’s Class• Introduction to Fibs and why it works in the financial markets.

• Addressing common myths

• Establishing ranges

• Fibonacci Retracements

• Fibonacci “Target Zones”

• Homework

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~ Introduction ~

Why do Fibs work? Why Derivatives Work

• 0 1 1 2 3 5 8 13

Life’s Rhythm:

• There is a pattern to life.

• Pythagorus discovered this pattern and Euclid later defined it as the Golden Ratio (.618) in the late4th Century BC.

• Made popular by Leonardo da Vinci in his illustration of Luca Pacioli’s Divine Proportion.

• Since their origin, the Financial Markets, have followed the rhythmic patterns of life.

• Causes of market rhythmic cycles:

➡ Weather

➡ Economic cycles

➡ Cultural cycles

➡ Public perception - “feeling”

You will find the color letters that you are looking for...

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If people feel most comfortable operating within a given rhythm...

And the financial markets are traded by people...

Then it is logical that the market will follow a similar rhythm (framework).

Fibonacci Analysis Myths:

• Myth #1 - You have to be good at math.

➡ Fibonacci analysis requires a balance of the creative and analytical.

• Myth #2 - Fibonacci analysis is confusing & complicated.

➡ Like any skill, practice is required.

• Myth #3 - This is just magic with numbers.

➡ Fibonacci analysis in the financial markets is over 800 years old. The foundational principles date back over 2,000 years.

• Myth #4 - You can simply drop Fibonacci analysis on your chart and expect profits.

➡ You must allow for expanding and contracting markets. The Fib ratio is theory while chart patterns are organic – living and breathing.

Fibs In The Financial MarketsEstablishing Fibonacci Ranges:

• The Fibonacci sequence is both an additive and multiplicative representation of the Golden Ratio.

➡ 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55…

• Fibonacci began applying this understanding to the currency market and published his findings in the second edition of Liber Abacci in 1228.

• Observation of market swings shows that points of support and resistance are often created near a logical Fibonacci Ratio.

• Ratios used for retracements:

➡ 0.618

➡ 0.382

➡ 0.50

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The responsibility of every analyst is to determine the framework of the market and apply that knowledge within a forecasting model.

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Measuring Fibonacci Retracements

Measuring Retracements In 3 Steps:

1.Identify the beginning and end of a range to be measured by locating pivot points. This begins the testing process.

➡ Look for gaps.

➡ Look for “significant moves.”

➡ Use secondary moves.

2.Work right to left.

3.Make necessary adjustments.

➡ Work to place the .50 retracement line within a gap or a significant move within the range if possible.

➡ Use historical pivot points as a means to confirm you are identifying the framework.

Measuring Retracements: TIPS!

• Configure your charting application to draw your retracement lines across theentire screen.

• In the absence of gaps, use a significant price move.

• Begin and end where you know the market has changed directions.

• Be willing to test different pivots.

• Candle wicks are often excluded. (Example: Shooting Star)

• Think of ranges like a sentence… locate the punctuation!

• Use the historical data to help you identify the framework… really.

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Practice Guide:

1.Use historical data.

2.Use a known point of support that you would like to practice your fibonacci retracement on.

3.Following the rules, work to make your fibonacci lines associate with the support point. (yes... force the fib lines to work)

The point of practicing is to develop the correct muscle. Not to be drawing random fibonacci lines. As the saying goes… Perfect Practice Makes Permanent.

Fibonacci “Target Zones” Target Zones:

• A fibonacci target zone is a way to quickly identify the market framework.

• Fibonacci target zones are an excellent way to answer the two most important questions in market analysis.

• Two most important questions in market analysis:

➡ Where should the market be trading?

➡ Where should the market not be trading?

• A market analyst must answer these questions consistently from both a bullish and a bearish perspective.

• Creating a fibonacci target zone is as simple as boxing in your three ratios.

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If the market is currently bullish, it should be trading above ____.If the market is currently bullish, it should not be trading below ____.If the market is currently bearish, it should be trading below ____.If the market is currently bearish, it should not be trading above ____.

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Homework Establish target zones that would have assisted you in entering a SBUX trade on March 4th, 2013.

Establish target zones that would have assisted you in entering an AAPL trade in October 2013.

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Establish target zones that would have assisted you in entering an AAPL trade in December 2012.

Establish target zones that would have assisted you in entering a EUR-USD trade in July 2014.

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