From the April 2014 issue of Futures Magazine • Subscribe!

Fibonacci keys and the E-mini S&P 500

Many traders are familiar with the Fibonacci numbers sequence and some of its applications and it has been the subject of many technical trading books. The better books often concentrate on the well-known Gartley pattern or Elliott Wave relationships.

However, it’s common for traders to get confused with Fibonacci relationships because they try to put the strategy in a box and make it work with an Elliott count that is only designed to be a guide. Others only know Fibonacci from the retracement tool available in trading software packages. 

Serious Fibonacci study, however, goes much deeper than software tools or relationships that just scratch the surface of analytical potential. Here, we’ll cover some common relationships that you can use to trade on any chart in any time frame, providing a foundation for advanced study.

Cross time frame trading

If you believe Fibonacci and Gartley are tied together, you will be missing many opportunities. Fibonacci relationships can be used for stocks, futures and forex charting. What works on an intraday chart will also work on a daily or weekly time frame. But there are a few things you need to know to become proficient and profitable if you seriously want to use this method.

First, there are different relationships between price legs. The most common revolves around the golden spiral relationships. The golden spiral is commonly known as the 0.618, 1.618 or 2.618 ratio. For ease, we’ll call it either the 61, 161 or 261 relationship. 

For many people, navigating around the intraday E-mini patterns is too complicated or a mystery because the patterns move so fast. Wayne Gretzky wasn’t the fastest, strongest or biggest player on the ice, but he is the greatest scorer in the history of the NHL. Why is that? Most of the players would follow the puck. Gretzky anticipated, correctly, where the puck would go. While everyone else chased the action, Gretzky usually ended up in the right place at the right time. By understanding the Fibonacci relationships any trader can also learn to be in the right place at the right time, slowing down the action. 

“High target” (below) shows us a 180-minute view of the E-mini S&P 500. On this chart, we are looking for a good target for the high. A common target is the point where the first leg off the low (in this case A) has a 61/161 relationship to the secondary low, which is B. In other words, A will be 61 of B-C and B-C is 161 of A. As you can see it’s not exact but it’s very close.

With Fibonacci, many times close enough is good enough. This is what confuses many. Some people shy away from trading with Fibonacci simply because they are not comfortable with this concept. They are looking for pinpoint, textbook precision that quite frankly is not there in many cases. In trading, there is no such thing as perfection.

Traders must learn to manage risk. Sometimes the legs will give you that close to a perfect 61/161 relationship. Other times, it will be slightly off. A 61/161 relationship might really be a 0.625/1.60, or it might even be 0.59/1.68. Let’s say you have one leg that is 9.5 points and the other leg in the sequence is 16 points. That is obviously not 61/161, and the actual calculation is 0.593/1.68. If the trader is going to make Fibonacci work, he will have to get used to this kind of imperfection. 

“Projecting the low” (below) is an example of a very close approximation—close enough, in fact, to call it a 61/161. The actual calculation for A is 12.25 points and BC is 20.25 points, which is a 0.6049/1.65. A tick either way would make it perfect. If you are getting the idea that the real-world use of Fibonacci is part art and part science, you are correct. 

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