Blog Archive

Sunday, May 8, 2011


1339 has become a very important level. The market is quite likely to become range bound near this value. I will write more about breaking out of this range later, but tonight I wish to answer a couple questions.

"Great lesson. What rules do you follow to initially establish the Fib fan?"

I find the starting point and place the zero line from there to the first peak or valley.

Initially 0.618 is a good line to use for the handle of the fork, but as the pattern ages you may find that the 0.786 line will work better, or after the pattern ages you may also find that placing the fan from the start to the latest peak or valley will work well with the 0.618 line.

I look to see how the fan falls along the pattern for confirmation, and I am not exact about placing the handle. I only use the fan as a gauge for the angle of the fork.

Keep in mind that the fork may change as time goes on. You are interested in immediate targets, not proving that the first fork you draw is the rock solid path of the market. That's why I will change my forks along the way. Early on, a thin fork may work best, but further down the way a wider fork will generally begin to call the targets better. Be willing to adapt, but don't sacrifice too much. If price escapes the boundaries allowed by the fan, then it's probably too far.

At that point you know that the fork has been violated and the trend has changed. Most of the time a beautiful symmetric pattern will develop between the tines, But there are times when symmetry does not exist. It's like a tree that grows an awkward limb or a crooked tooth. Nature is not always perfect, but odds are in favor of some type of symmetry, whether it be perfectly balanced or related by a Fibonacci ratio.

It's not a perfect science. It takes an eye to see the right look. But I believe it's like anything else. Most people agree upon what beauty in nature looks like. You may not be able to go to an art show and discuss the fine points, but you probably know when art has appeal. And as you look or listen to art you begin to recognize it with even more ease.

" One trader's dilemma is balancing adequate time in the market to generate profits against risk exposure associated with increased time in the market. Intra-day holding periods reduce time exposure but often at the cost of returns in the absence of large position sizing or leverage. I would like to poll this accomplished group of indicator experts to determine profitable indicators we have successfully used (made money after transaction costs) for positions held for less than 5 trading days?"

My experience has lead me to believe indicators are about as good as simply watching for two or three bars in the same direction.

As I have recently been showing, it's not very useful to know when the market has turned if you don't know how far the turn can be expected to run.

There are a few exceptions. But they require a sense of intuition or recognition of patterns. Systems such as trend lines, Andrews Pitchforks, channels and previous areas of support and resistance will give you this, but pattern recognition is beyond the ability of Think Or Swim scripts.

I have invented a few indicators that turn before Price, but these are not 100% certain, and require interpretation which is once again beyond the ability of any scripting language.

So ultimately targeting is not generally within the scope of an indicator. Pivot points and a few other... (make that a very few other) indicators such as Parabolic SAR provide real limits. Pivots are so ambiguous that they can only express both a high and low limit with a preferred median, but at least Parabolic SAR conveys support and resistance, and here again, it does a rather poor job of targeting.

My point is that trading is still a learned art that can not be perfected by algorithms in the ToS platform.
To learn the art of trading you must learn to recognize the markets patterns.

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