The Fibonacci Long Bar Method

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The Fibonacci Long Bar Method

The Fibonacci Long Bar Method is a style of trading with Fibonacci Retracements that I have developed over the years. This method focuses on day and day to day trading utilizing retracement levels following a sharp single day rally or decline. This method is not suitable for everyday use but is quite handy at pinpointing super short, near and short term entries in a rapidly moving market. Why is this? Because the most likely time to find a significant amount of retracement is after the market makes a larger than normal move. What exactly is a retracement is a question you may be asking yourself so I will begin with a quick look at Fibonacci and market retracement before illustrating the technique.

Retracement – A temporary reversal in asset price reversal that is counter to the prevailing trend. Retracements are not necessarily reversals but can lead to reversal. The amount of retracement can often provide clues as to whether the counter trend move is one or the other.

Fibonacci – Was a Renaissance era mathematician who widely disseminated the theory and math behind the Golden Ratio. The Golden Ratio is a mathematical relationship found between everything in nature. Fibonacci Retracements are projected target levels for possible retracement based on the math of the Golden Ratio.

Because retracements are temporary dips in asset price counter to the prevailing trend for this method we are going to use the direction of our Long Bar to set trend for our day trades. The first thing to do is to identify a Long Bar. We will do this on a chart of daily prices. The Long Bar could be a long white or a long black candle and should be noticeably longer than other candles over the past few months. I suggest waiting for a candle that is at least a 1% movement of asset prices, more is better and will result in a stronger retracement/test of support/resistance. I say test of support/resistance because that is what a Fibonacci Retracement (FR) level really is, a target at which you may expect to find either support or resistance. Keep in mind that an FR is not a signal, it is a place where a signal may be found. There are some loose rules concerning the FR’s but again, they are not signals. One such rule is that if a FR is broken and confirmed the next FR will be your target. Another rule is that if an asset only retraces to the first FR it is more likely to continue on in the direction of the underlying trend than to reverse. Look at the chart of the Dow Jones Transportation Average below. I have identified a potential Long Bar. It’s not super long but is noticeably longer than the average candle stick.

I always start before the market opens, that’s when I find my Long Bar and prepare for trading. Once a bar is identified use the Fibonacci tool to draw a FR in the direction of the candle. Once this is done you can move down to a lower time frame chart, one that is suitable to your style. I use hourly, 30 minute and 10 minute but take most of these signals off of the 10 minute chart. The chart below shows the long bar broken into 30 minute candles with the Fibonacci Retracements in place for the next day’s trading.

You will begin to get your first signals at the open, even before the open. Futures trading will indicate if the asset will open higher or lower than the previous days close. Look at the chart below. The first signal occurs in the first ten minutes of trading. The asset opens above the previous close and then moves below with the candle closing below. The next candle is Tombstone Doji confirming the resistance level of the previous close. Entries can be taken for bearish positions with 10 to 30 minute expiry at this signal. Later on asset prices find support before even retracing to the first level, 23.6%, a very bullish sign. The next signal occurs once prices break back above the previous close. The first break is a weaker signal and can be taken with longer expiry, the second strong signal can be taken with shorter expiry. If you look closely a third signal is beginning to set up as prices retrace back to the previous close, now support.

It is most difficult to use this strategy if you use it by itself. Fibonacci’s are a great trading tool but need confirmation of other indicators such as stochastic, MACD, Moving Averages and other standard tools. Notice in my charts how the 30 bay EMA helps to support the asset price as it moves higher.

Applying Fibonacci For Day Trading

Fibonacci Retracements are one of my favorite trading tools. The levels predicted by the tool are remarkably accurate and provide a great number of trading opportunities for me in my day to day routine. The thing is, Retracements are best used when dissecting a pronounced trend or sharp movement in stocks so they are not neccesarily the first thing you would turn to as a day trader. Why is this, simply because the day to day movement of any one asset, particularly a forex pair, is not that great. To understand let’s touch base quickly on what Fibonacci Retracements are. They are price levels determined by the Golden Ratio as laid out by the famed mathematician Fibonacci. The levels are percentages of a given price movement and are a useful as target areas for entry points. This tool is commonly available as a standard feature of most charting packages and comes with a few variations. Typically I would draw retracements on a chart of weekly or daily prices and then use those levels as potential areas for continuation or reversal. This method doesn’t provide a whole lot of entries for day traders but there are two methods of using Fibonacci that do.

Warning! Fibonacci Retracements are not signals, they are target areas where a signal may occur. Trading simply because price has reached a retracement level is not a sound method. Other signals indicating direction and duration are required before trades can be taken.

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The Long Bar Method

Believe it or not I just made up the name of this strategy but the strategy itself is old, very old. The Long Bar Method targets specific days and is not for use on a day to day basis, unless of course the asset you are trading is volatile and makes a lot of wide swings. For this method to work you need to be patient and wait for a day when news, a technical break out or some other event causes the market to make a much larger than normal daily movement,say in the range of at least 1% or better. The bigger the day the better because you can expect the bounce back from that day to be stronger than on an average day. Once you have identified a day as a potentially good one draw (on the daily chart) a Fibonacci Retracement from the high to the low of the day; if it’s an up day from the low to the high, if a down day from the high to the low. Once this is done you can move down to a chart of hourly, 30 or 15 minutes as you prefer. Then as price bounces, or retraces, its way you can use the Fibonacci Lines as target areas for signals.

One note of warning, there is not always a snap back following a major market movement. If a rally is strong then there might be two or three days of upward movement or more before any kind of a snap back occurs. The same is true in a strong bear market. If this happen then you can draw your retracements for the entire movement, not just the one day.

This strategy works best when the market has made a major movement in the magnitude of 1% or more. Knee jerk reactions to bad news and speculative rallies on good news are two such events. Any time the market makes a significant movement a Fibonacci can be applied to that day or week.

The Day Wave Method

For this method I suggest that you use a chart with 30 or 60 minute candle sticks. This is a good time frame for watching the day to day swings in the market and for using Fibonacci Retracement. This method is also more useful for the average day trader as it can be used any day, not just after a strong market movement. To apply it, pull up a chart of 30 or 60 minute prices and then apply a Fibonacci to the most recent trough and peak. It does not matter if it is drawn from a peak to a bottom or vice versa as this is not a trend following technique. With this we are simply trying to find appropriate areas where a signal, any signal, can be found. Look at the chart below. I have drawn a Fib from the top of an intraday peak to the bottom of an intraday trough. The Fib tool provided several levels where signals might form. The bounce back was strong enough to blow through the first two retracement levels but gave an early signal at the 50% line. Then a second signal, a much stronger and tradable signal, forms from at a place where put trades could have been taken.

One note of warning, day to day market moves are highly susceptible to news and other near term market moving events. These can have an adverse affect on your trading if unprepared. Always check the economic and earnings calendar before entering a trade.

Java Examples – Calculating Fibonacci Series

Problem Description

How to use method for calculating Fibonacci series?

Solution

This example shows the way of using method for calculating Fibonacci Series upto numbers.

Result

The above code sample will produce the following result.

The following is an another example of Fibonacci series

The above code sample will produce the following result.

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