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Tuesday, May 24, 2011

DIDN'T YOUR MAMA TELL YOU NOT TO FIB?


You should have taken your mothers advice if you have strayed into the world of Fibonacci levels. There was a question posed on yesterdays post about my views on Fibonacci levels, so I thought it would be a good topic for today. I have to admit early in my career I studied these at great length and thought there might be something to them. As I lost money time and time again wondering why price did not stop magically at these lines, I never could figure out which one out of the hundred I could draw, might result it price actually stopping there. As you can see in the above chart, every one of these lines is a legitimate Fibonacci level that has not worked during our monster bull market. There must be 50 of them, so 0 for 50 or so? This is not much of a strategy to me. The problem is that at the time you draw in retracement lines to a prior high as in this case, it is clearly the right place to draw them. Then price moves through those levels and you find the next higher spot to draw them. You never know what the hell is going on. The proponents tell you to look for clusters, this makes sense to me. However, look at the clusters above, they are cluster ....s!

The problem with this type of approach is now you have to draw even more lines to finally get one that works. If you draw enough lines on a chart, something is bound to happen around one of them at some point. The question is will you have any money left by the time that happens? There might well have been some retracement levels that worked, I just drew in the resistance levels from the old down trend alone. The screen would be completely illegible if I also put the fibs going the other way in as well. I have always had problems with the bar in space trade. What this means is going in just in the middle of open water in price just because you have some magic number a program generated. At times you can get lucky, but most of the time you will get run over.

Have at it if you will but it is my opinion that these are absolutely of no value at all. There are traders who are successfully who use these, Kevin Haggerty is one I know personally who makes heavy use of these. However, it is his intuitive sense of where the markets are going by looking at many other things that are the key to his success, not his use of these numbers.

They could put me in a straight jacket in a white room and give me a crayon, and I would draw with a crayon between my toes .236, .382, .50, .618, .707, .786, 1.27, 1.44 arghh! Look elsewhere folks, this stuff is a bill of goods being sold by snake oil salesmen. I cannot tell you how many times many many years ago I faded markets at these levels one after another just to see them continue on and stop me out. It is not a useful tool in my opinion. For those of you that can use these and consistently make money with them, my hat is off to you, you are better traders than I am.

The next chart is a live experiment with the concept of buying into weakness in trends and scaling in as the market gets weaker. This is a way I traded many many years ago with futures. I used to also require that open interest be declining when the pullback in price occurred. I would then go long the first high that broke. Larry Connors wrote a book describing a few ways of doing this, so I will not get into the actual mechanics of how to do it so as not to infringe on his writings. However, the idea is just buying more and more as price declines. You then exit quickly when the rebound happens and indicators get to short term over bought levels. In this case, the first unit of the Q's was bought yesterday, with a second unit coming if today closes lower. If we rally today enough to get indicators into the over bought zones, the first unit is exited. You can get 80% winners doing this, it can be proven statistically. The problem of course is the losses are doozies because you do not use stops. There is I am sure a Fibonacci number in there somewhere where I bought the first unit yesterday, so maybe it will work?

Since I am expecting an equity bounce to start within a day or so I thought this might be fun to do one of these trades with real daniero at stake. I have done a few recently that have all made money, but this is one I am posting live so we can live or die with it together.




This is an interesting way to trade I have to admit, and I am not totally comfortable with this since I typically like to trade with short term momentum and this trades completely against it. However, I am not closed minded so anything is worth considering in my view, so let's roll. Larry Connors has all kinds of strategies built around this general idea. Visit them at Trading Markets.com if you are interested in learning more about that approach.

The next chart is that of Bonds. I am looking for sell signals again after that boneheaded swing I took at them the other day. We still have a good up trend in place, so until that trend line breaks, I am not sure it is worth trying to short this yet, but I am lurking on this one.




That is all I have for today. I am looking for equities to weaken throughout the day and close low. However, I am looking for a move up starting any day here into the beginning of June, which could be our shorting spot. I have no idea if that is going to play out, but it is what my studies over the weekend told me to look for.

Good Trading to all



1 comment:

John M said...

Sounds good to me.

Fibs...good for short term pauses, maybe. They seem to work better on a big scale, long term, on daily or weekly or monthly charts. Don't see how anyone trades off them. Maybe they work for 'investors'....