SPECIALIZED FIBONACCI OBSERVANCES

SPECIALIZED FIBONACCI OBSERVANCES
Fibonacci (Fibs) has been my favorite technique of all times, and due to my
mindset I always have a mental filter looking to see how it can be adopted to
whatever I am doing (including non-trading related things).
This section will not cover Fibonacci theory; for that go read the section
explaining Fibonacci in my eBook “Forex Surfing” (I also intend to one day
get around to writing a detailed eBook teaching just about everything I know
about Fibonacci including its advanced concepts). In this section I assume
you are already familiar with these concepts so I won’t review much.
To start off let me be very clear hear that you will not be using standard
Fibonacci theory directly as a trading methodology for scalping. What I will
describe here are some observations about the behavior of the markets (from a
scalping perspective) that some concepts of Fibonacci theory helps to
support. Furthermore, this particular section isn’t so much about specific
entry/exit points (though it certainly can be used to help you make such
decisions), but rather to help you to learn to evaluate the strength of a
particular trend, and to justify some stop levels.
In an uptrend (just reverse everything I say for a down trend) the market
typically moves in waves making progressively higher highs and higher
lows. When a retracement occurs, according to Fibonacci theory, the price
will typically reach to be around one of the four main retracement levels;
38%, 50%, 62%, or 79%. Because the swings that often occur on a scalping
perspective scale are so small I have simplified the ratios to “zones”
conforming to my own theories based on my observations (go ahead, call it
the “Borowski Swings” theory ;P ). These zones are simply thirds of the
retracement range (amplitude or height of the swing), and I simply call them
(ummm… making up the names now – a lot of the concepts I come up with I
simply use without naming them, but have to name them for my eBooks to
have a convenient label to use for explanation purposes) “Shallow Green
Zone”, “Mid Yellow Zone”, and “Deep Red Zone” (after some thinking I’d
decided to go with traffic light colors for reasons that will become apparent
soon).

So what are these “Scalping Swing Zones” for? Simply, the third zones help
you to gage visually the relative strength of a trend that you are seeing.
In Fibonacci theory it is generally understood that if the swing retraces to only
the 38% level that there is usually strong momentum in the trend (likely to
continue strongly for a while yet), whereas on the opposite side of the
spectrum if the swing retraces down to the 79% level that usually signifies
that the trend is loosing steam and so the extension usually won’t go as far and
the possibility of seeing a potential turn around of the prevalent trend becomes
a much stronger probability.
Often during an overall trend you’ll see that early in the trend the swings
bounce at the shallower levels, then as the trend progresses the swings tend to
retrace deeper and deeper often forming what looks like a rounding top as the
trend seems to lose steam. Imagine that this phenomena is somewhat like a
bouncing rubber ball that with each successive bounce loses energy. This
phenomena is regularly seen on larger charts (go look at some hourly charts
and zoom into some obvious trends and chances are that you’ll see what I’m
talking about right on your screen).
Here is the best chart I could find of EUR/USD (one hour charts) kind of
showing what I’m talking about in a downtrend. This doesn’t always happen
“text book perfect” (and this isn’t the absolute best example), but you’ll see
that the concept has merit over all. The Fibonacci lines are drawn to show
you where they are, and you’ll notice that the retracement came close to the
labeled key Fibonacci levels.
In scalping, the above statements are still quite true, however because of the
tiny size of the petit waves the standard Fibonacci percentages aren’t always
accurate. This is because in such small waves the difference between the
Fibonacci percentages might only be a couple of pips, and so it could be easy
for the market to overshoot a percentage level creating a false impression for
your. Furthermore when the market has dipped down into the retracement and
before it turns around into an extension there is often some kind of a
stagnation (lasting briefly or for a while) and the stagnation often ranges a few
pips, thus not being completely clear at what percentage level is best to
consider it (I know, I know, of course it is the deepest price that determines
this, but I like to think of it a bit differently).
forex sato
Thus the “Scalping Swing Zones” is a concept better adapted to this tiny
perspective of market activity.
Usually you don’t have to draw any analytical lines to see in which zone the
price has retraced to as it is easy to visually imagine the thirds. Furthermore,
if you get a stagnation area in your retracement you usually pay attention to
which third zone that most of the stagnation is contained within, but if a
significant portion of the stagnation is in a deeper zone then consider it as
having retraced into the deeper zone.
If the market retraces into the “Shallow Green” Zone and then proceeds to
resume the trend then this is generally regarded as either just a brief pause in
the trend or a still rather strong trend (likely to continue for a while
yet). Often you’ll see a retracement into the “Shallow Green” zone after the
market has been “Going For It”. Most often when the market “Shoots” it’ll
“Shoot” from the “Shallow Green”. Using standard traffic light mentality…
“you’re green to go!”
Most often you’ll see the market retrace into the middle section called the
“Mid Yellow” Zone. This is quite typical and a great zone to enter a trade
within (if you can) because your stop loss will typically be below the 100%
retracement level (so feel free to decrease your stop if you want at the start of
the trade) and you’ll often score many of the pips that the market retraced
(potentially catch them twice). Your key Fibonacci retracement levels are
contained within this zone (the 38%, 50% & 62%). When the market retraces
to within this zone (and you get a good reversal for an extension to enter onto)
then you are generally pretty happy. Using standard traffic light mentality…
“you’re yellow to step on it!” (think about what you actually do (not what
you’re supposed to do) when you are driving. When the light is green you
keep driving, but when the light turns yellow you step on the gas.)
Sometimes you’ll see the market retrace into the last section called the “Deep
Red Zone”. This often happens in a slow moving market such as when a trend
is loosing most of it’s momentum, or when in a consolidation patter
(particularly a sloping consolidation), and of course in a triangle pattern (as
the market bounces tighter and tighter it often retraces through the “Deep Red
Zone”). Using standard traffic light mentality you’d usually stop - not
necessarily stop trading but rather you’d stop to consider what the signs are
telling you. It is still possible that the market could resume the trend with
renewed enthusiasm, but you need to be aware that a pending reversal might
not be far away, and if you end up jumping into a trade (in the direction of the
prevalent trend) then don’t hold your breath of it going too far up before it
reverses again.
Here is an additional point to make regarding scalpable swings that has
nothing to do with the above-mentioned zones. This is about your stop levels.
Most petit trends (and their swing size) typically range in size from about 10
pips to about 30 pips (sure, there are occasional larger ones), but if you asked
_me what the average is I’d say that it would be about 15 pips (no, I didn’t
make any actual calculations. This is an estimate based on what I’ve often
seen).
Standard Fibonacci trading methodology dictates that when you enter a trade
(say getting on around the 62% level) that you place your stop loss order at
the 100% level (the base of the swing). The idea is that if the market retraces
all the way to the bottom of the swing then chances are you are seeing a
reversal and so the principle of the Fibonacci swing extending for profit is
thus proven to be wrong in this instance. I talk extensively about this concept
in “Forex Surfing” as it is the basis of the “Surfing” trading methodology
(note: feel free to use scalping as the entry method for surfing types of trades
to take advantage of better entry price).
Because the swing is small (like I stated earlier, typically between 10 to 30
pips) when you enter into a trade on a retracement then your 10 pip stop loss
order will often be around the 100% retracement level. Think about it. If you
have a 20 pip swing that retraces into the “Mid Yellow” range, then if you
were to get in around there your stop of 10 pips would be around the base
price of the swing. If your stop is below the 100% retracement level then that
is also fine.
So all I wanted to point out here is that often your 10 pip stop order will be at
more or less the correct price without thinking too much about it simply
because of how everything works.