“Traditional and new uses of Fibonacci retraces in modern markets”, SIAT Journal VII – no.13 – July 8, 2014

Dear reader,

I want to briefly talk to you about a recent topic on which I have prepared and published a research paper for SIAT/IFTA.

The research paper I have recently published on the SIAT Journal, the Italian Society of Technical Analysis, member society of the larger IFTA (International Federation of Technical Analysts) includes a review and critique of common and traditional uses of Fibonacci retraces, and discusses some of the problems related to both the way numbers are derived and their use.

Problems like the way extensions, expansions and projections are used, the concept of convergence or confluence (also known as “clustering”), the inversion of semantics and others are explained with real trading examples.

In the second part, the opportunity to use Fibonacci retraces with a different objective is investigated. Such objective is no longer, or I should say not only, that of identifying low risk trades with very high probability of success, within retraces.

New objectives include the possibility to “frame” and ‘explain’ price structure?

What does that mean?

Typically when we think of Fibonacci retraces we think of trending market in counter-trend moves and of ways to enter the market as it resumes the move higher.

But we rarely think about framing the sequence of price movements, the price structure resulting from the interactions of effects of players (humans and algorithms) on price in the different timeframes.

The majority of people dismiss the idea that price could be “explained” somehow and to a certain extent.

However modern market structure with a strong participation of algorithmic trading, that in certain markets is responsible for over 80% of the overall volume, offers opportunities to do just that.

In fact, there are methods that allow to identify what I call the “algorithmic trading footprints”, the levels and areas of participation from algorithms and professionals, on the upside or the downside, in major markets.

Not only that.

It is also possible, due to the presence of algorithmic trading on the smaller timeframes, to confirm the presence and activity of the big players (the smart money of the Bandwagon Theory) and their commitment around the areas of support or resistance.

In the second part of the paper I show how, using methods based on the observation of price behavior in presence of program trading – an important class of algorithmic trading  – it is possible not only to  solve most of the issues and problems related to the traditional use of the Fibonacci levels and retraces in the modern markets, but also to enable enhanced and precise timing and technique that allow to obtain risk-free trades with very high probability. These methods also enable price discovery, when key levels watched by algos are violated.

Methods grounded in the observation of price behavior in presence of algorithms include, for example, the FibStalker method and the FibStalking timing technique are not theoretical models but rather practical and effective trading methods that allow to pinpoint entry areas, entry levels, stop and profits with uncanny, consistent precision.

 

This is how Eugenio Sartorelli, member of SIAT scientific committee, introduces my paper:

“.. the second paper is from Giuseppe Basile, who has a huge experience with Fibonacci techniques he has used in trading for years. The first part revisits and critiques the different uses of Fibonacci retraces and projections in Technical Analysis. In the second part a few techniques created by the author are showcased, with the intent of explaining price structure.

The research paper featured in the article is the third after a paper on Money Management and its linkages to trading goals (2012) and an analysis of the Effects of HFT (High Frequency Trading) on price and Program Trading (2013).

If you want to learn more about my research, check the “EBook and Papers” page on my blog and watch the videos in the Video Analysis & Forecast section.

 

Please let me know what you think about the content of this article. Go ahead, leave a reply in the form below.

 

In my research and practical trading I study the effects on price of classes of algorithms in high volume markets. If you are interested in a new and effective trading edge, check my work at www.fibstalker.com.

 

Happy Trading

~FibStalker

WHO IS GIUSEPPE BASILE?

Giuseppe Basile
Giuseppe is a Certified Market Technician and swing trader, IFTA and SIAT associate. Holds a B.Sc. in Computer Engineering and a MA in Finance. In the markets since 2001, became trader and mentor in 2007. Studied with several traders in UK, Europe and US, adding over 7,000 hours of screen time between 2009 and 2013 alone. In 2012 launched FibStalker, a blog specializing in forex, futures and stocks trading, where he also runs a free newsletter and publishes daily videos with actual setups and complete trading plans.

Giuseppe’s unique method attempts to spotting footprints of Program Trading, a powerful class of algos that governs the markets. Giuseppe is a rigorous researcher with several published papers about money management, automated trading, HFT and innovative timing and trading methods.

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