Fibonacci Trading Strategy

[Caseynotes]

I came across this Fib trading strategy a short while ago and have been playing around with it for a few days and must admit it is very interesting. It's presented in a 45 min video that is interesting in itself for some of the concepts on Fib and Strategies in general.

At the start of the vid he says that the strategy is in the second half and to skip forward if you want but don't because there are points of interest throughout and he doesn't spend much time explaining Fib anyway.

The key is the systematic approach to quite a simple plan and the entry signal is a sign that larger traders are looking at the same thing. I've not properly backtested it but playing around it looks quite sound. There are many times when the criteria aren't met which is fine because you're not entering those anyway. In the pics below I found 1 day that had 5 entries all of which came off though admittedly some entries were triggered while still in the previous trade and the last entry of the day carried over night and nearly stopped out and actually just missed the target the next day by a couple of pip but the risk reward ratio is set at 1:3 so hey.

The entry signal bars are boxed in white, the chart is the 5 min EURUSD but the system looks like it may work on any time frame. I took the signal as a wick or body closed on or very close to the 50% and was followed by an opposite colour bar. Entry was on that bar close.

[Caseynotes]

A few have may have seen the video explaining this strategy by now so I shall say why this strategy impressed me and I must say not many strategies found on the web do but this one is different, here's why.

Firstly it's not really a Fibonacci trading strategy. It doesn't rely on Fibonacci - it relies on other traders relying on Fibonacci. 

But that's not quite true either, it uses the 50% level and 50 isn't even a Fib number.
What it's really doing is looking hard at the 50% retracement level of a strong trend leg. A perfectly reasonable place to look for a pullback to end. The strategy is just using the Fib tool to mark it on the chart.

The next important point being the signs used for a signal. The first sign is the price drop being halted at that particular level (50% retracement). That can only mean that traders who are capable of moving the market had placed orders precisely at that point. They got their Fib tool out and placed speculative limit orders on the 50% retracement level. 

In some cases that will work, there will be enough buying to halt the price drop at 50%. If you are a big enough trader to move the market and you have just helped stop the move down then you will start adding to the long position. If that works the market will turn and that will give the strategy's second sign, the next candle being the opposite colour (entry on this bar close).

So what the strategy is really about is looking for specific signs that big traders are using the 50% retracement level to re-enter the market expecting trend continuation, identifying the point when big traders are entering the market should be the main goal of every retail trader.

Often the 50% won't be used or the traders aren't strong enough to halt the market or not strong enough to reverse it, fine - you don't get a signal so you don't enter. And of course even with all the signs the trade may not work out but I like the principle behind the strategy and I like the idea of not trying to look everywhere on a chart but in one specific place only, and just let all the others go. So you are looking for one thing on many charts rather than many things on one chart. 

Worth a forward test run on the simulator when I can find the time.

[Caseynotes]

Would have been more useful if I had included a more detailed example in my first post, I've taken this one from Friday EURUSD 5 min, interesting to note that after the initial interaction at the 50% retracement level during the afternoon the 50 was repeatedly attack and held through the rest of the day into the close.

[Guest Zenforo]

How do I install the indicator?

[Nelsy-Boy]

I don't follow the 5min chart just the daily but I thought I would give it a go on EUR/JPY. After dropping, there was a retrace back to the Fib 50 on 7-11 followed by an opposite candle on 8-11 which I then shorted. So far so good, but it did go against one of the indicators I like to use so I was a bit worried. I wonder if the EUR/JPY will go down as far as 1.5 times as the strategy suggested because that is quite a drop. 

[Nelsy-Boy]

One thing I am unsure of. Could anyone describe what an "impulse move" looks like. Thanks in advance.

[Nelsy-Boy]

GBP/USD on daily time frame started impulse wave down from 12th Oct  and finished on 30th Oct. FIB retrace up to 76% on 7th Nov with big selling candle on following day. All the sellers were in at this point. If you shorted here, where is the first possible sticking price on the way down?

[Caseynotes]

Hi @Nelsy-Boy, the impulse move just means the 1st leg of a strong move in either direction where you would draw the first line of the fib 0 - 100 and the potential retrace levels are calculated from that.

BTW I think you are probably right in that the original target may be a bit of a stretch and I would cut it back and see how that went in testing first, especially on the larger time frames, will be interesting to see how it goes on the daily.

[Caseynotes]

Hi Zenforo,  the Fibonacci tool is already installed on all the platforms, on the new platform look in the indicators section for Fib Retracement. In MT 4 it's on the top toolbar.

Also, take a look at this short vid on drawing Fibs.

 

[Guest Zenforo]

Thank you for the video. I have seen it and installed it. I am still a newbie using a demo account. So, I am learning from the video and I think I am making progress with the drawings. I think I will post a screenshot of how I did mine. I am yet to go live, but I will soon. 

[Caseynotes]

Hi Zenforo, you are most welcome, have a practice and do post some screen shots, keep an eye out on the other fib numbers and see which one you think is most commonly respected.

[Guest jomni]

This is interesting and maybe my style of trading. I am trying it out on demo. Some observations and questions.

1. The legs are subjective. Do you include minor retracements with the general swing? I guess it's all arbitrary, the larger the reference swing, the longer the position holding time will be. If you do fibs on a small swing, then the trading window is shorter, stops are closer and less reliable.
2. If it already bounced at the 38.2% mark, do I discount the setup already? Or do I still wait if the bounce fizzles out (not breaking the Fib high/low) and goes further down to 50%?
3. You seem to be betting on both sides of the market going long and short with no opinion on whether it's a continuation of a long uptrend, a reversal, or a short pause. You just take either long or short positions whenever a 50% bounce happens at whatever level. Is this right? Wouldn't it be better to bet just on the side of the longer trend? At the back of my mind, I kept thinking if I was actually betting against the market, hoping for a reversal instead of riding a continuation. Does anyone supplement this system with another long-term indicator?

[Caseynotes]

Hi @jomni,  you are right in that all technical drawing is subjective. My own thoughts are that the impulse leg should stand out from the prior price action on the chart and the size of which will depend on the time frame of the chart you are using. So even if the larger time frame charts say the impulse leg is small and against larger time frame trend it will still be relevant on the smaller time frame and you will just be expecting the duration of the trade to be shorter as the target is set in advance and is a ratio based on the length of the impulse leg.

With regards to point number 2, I would not be concerned about previous bounces at the lower fib levels and in fact consider that to be supportive, also in back testing I found price could still drop lower than 50% before recommencing in the direction of the impulse leg.

The system is basically a way of entering on the first pullback of a potential new trend phase on the time frame of the chart you are watching.

As always testing over a reasonable number of trades will hone skills and determine the longer term validity of the system.

[Guest jomni]

I did end up with a long and a short for the same currency. I guess this acted as a hedge for sideways movement. If the trend clearly happens, one side gets stopped out and the other is making money. 🙃

Well, so far I have lost most of my trades. Is the target too high? There's no case where I achieved it. 😭

[Caseynotes]

Hi @jomni, that's interesting, what market and time frame are you using? The target may be too high, the system says 3 x the 0 to 50% value so check to see if 2 x might be a better target.

You may get new entries before the current trade is closed but they shouldn't really be in the opposite direction. A new impulse leg should be outstanding on the chart, a new impulse leg in the opposite direction would have to be really outstanding or it wouldn't be outstanding if you get my meaning.

As discussed previously fibs can be a bit subjective and there is a bit of an art to it gained through practice. The chart below is the 4 hour eurusd. In the first example the impulse leg needed to be redrawn 3 times because the pullbacks just petered out. In the second example there was initially a short leg down but not outstanding so waited til was able to draw a longer leg. The 2 50% entry levels are marked with a down arrow.

  

[Guest jomni]

I tried using the 5min timeframe.

[Caseynotes]

Hi @jomni,  the system (if it works) shouldn't be time frame dependent, I just used the 4 hour because it happened to be open in front of me. Really just wanted to show that the drawing of the impulse leg often needs regular reappraisal (as does any technical drawing on a chart), and that there will be continuous attempts to turn price that fail and that we are looking for a meaningful retracement off an outstanding (preferably out of a period of consolidation) move in either direction that may be signalling the start of a new trend . 

I usually look for a retracement to end between 40 and 60% as having the most likelihood of success, what the system is saying is to look for big players who are acting at the 50% and just go with then with a large stop (back at the start of the impulse leg).