Fibonacci

Trading Techniques

Fibonacci expansion:
A better way to time price targets
By To n i H a n s e n

Here we show how to use Fibonacci expansion levels to establish high-probability

target levels and manage open positions as they unfold.

I
dentifying turning points in the mar- rect applications and interpretations can For more from Toni, go to
ket can be a daunting task. If you are take years to master. futuresmag.com/Hansen
already in a position, it’s easy to let A disconcerting fact for those studying
your emotions take over and throw your market indicators is that there are rela- The significance of the Fibonacci num-
larger goal out the window in favor of tively few that can assist in all aspects of bers and resulting ratios is a topic that has
smaller, more immediate returns. Often, trade management. One exception is a been debated widely over the years. While
this is the wrong approach and you will form of market analysis that we know scholars argue the veracity of many claims
stand on the sidelines as prices continue today simply by the name of the author that Fibonacci is part of the underlying
to rise or fall in accordance with your ini- who is credited for introducing the sys- fabric of natural design, in the financial
tial bias as you mentally slap yourself for tem’s underlying numerical sequence to markets it is the skeptics that often take
your lack of discipline. the West: Fibonacci. a back seat. Support and resistance levels
Identifying price targets based on Fibonacci numbers and ratios
Sweet sequence hold remarkably well when applied to
Using Fibonacci properly
Fibonacci indicators that have become chart analysis. This is true especially for
Taking the anxiety out of exits
popular in technical analysis today are forex and futures markets and in individ-
When your instincts are telling you that based upon ratios that are derived from ual, high-volatility securities.
the odds are in your favor, why is it so dif- the numbers that make up the “Fibonacci There are numerous applications for
ficult to just stay the course? For most, the sequence.” This sequence is the result of Fibonacci ratios in technical analysis.
reason boils down to confidence. While adding each new number to the one that Among the most popular are Fibonacci
the seeds of confidence are often sown precedes it, beginning with 0 and 1. For retracement levels, price and time exten-
in instinct, it is reason that nurtures your example: 0+1=1, 1+1=2, 1+2=3, 2+3=5, sions and Fibonacci fans. While these
ability to trust those instincts. 3+5=8, etc. tools transcend markets, they also tran-
The greatest key to building confi- After the first several numbers, an scend time frames and are viable for trad-
dence and hanging onto winning posi- interesting symmetry begins to develop. ers and investors alike.
tions longer is to have a solid target and For example, from 13 onward, every time
exit strategy in place before initiating you divide a number by the one to the Simple application
a trade. The majority of traders try to right of it, the result is 0.618. When you A trading minimalist can appreciate the
improve their odds of correctly identify- divide a number by the one two places to simplicity of relying on pure price action
ing these targets through the use of indi- the right, the result is 0.382. These num- to decide how to place and manage a trade.
cators. Most indicators, however, are only bers are converted by market analysts Many popular indicators simply create clut-
as good as the trader using them and cor- into 61.8% and 38.2% respectively. ter and confusion, eroding confidence as

28 FUTURES February 2014

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 opposed to bolstering it as the market land- Expanding opportunity
scape shifts and trends change. Fibonacci,
on the other hand, is rather exceptional. It Fibonacci expansion targets can take some of the guesswork out of entering and exit-
works well in both a trending market and ing your profitable trades, regardless of your time frame. Here, the first chart shows
the initial opportunity to enter using Fibonacci expansion. Even if missed, however,
in periods of congestion.
we can regroup, reapply our Fibonacci expansion and try again. This is shown in the
Although learning a new system of second chart.
market analysis might seem daunting,
and the plethora of Fibonacci applica-
15,320
tions can make some traders shy away,
many Fibonacci techniques are surpris- 138.2% expansion = 15,294
138.20% (15,294) 15,297
15,300

ing simple to use and are relatively fool- 15,280

proof. Perfection is not necessary. 15,260

A Fibonacci expansion is a type of exten- 15,240
sion tool that relies on three price points 15,220
B
instead of the typical two you will find 15,200
when using Fibonacci retracements. The 15,180
first two anchor points in a three-point
15,160
expansion are based on a primary trend prior high and 61.8%
expansion 15,140
move, otherwise known as an “impulse
15,120
wave,” in a futures, currency or security. C
15,100
In an uptrend, the first anchor A-B-C highs and lows
point is the low of the uptrend. This A within the channel 15,080

is shown as “A” in the accompanying 10/15 05:00 10:00 15:00 20:00 10/16 05:00 10:00 15:00 20:00 10/17
charts. After selecting the Fibonacci
expansion tool in your charting plat- 15,320
form, click on this first low to begin the 123.60% (15,298) 15,300
123.6% expansion = 15,298 15,297
expansion. Next, click on the high of 15,280
the impulse wave. This is shown as “B”
15,260
in the accompanying charts. The third prior high and 38.2% expansion
15,240
point, marked “C,” anchors the expan-
15,220
sion move itself. B
15,200
Consider a trade in the E-mini Dow
futures as an example. This trade uses 15,180

Fibonacci expansions to demonstrate 15,160

how to identify a target that developed C 15,140

overnight. The indicated circle in the 15,120

first chart in “Expanding opportunity” A-B-C highs to last pivot low at 15,100
(right) shows an early buy trigger that bottom of the channel
15,080
was missed, while the circle in the second A
10/15 05:00 10:00 15:00 20:00 10/16 05:00 10:00 15:00 20:00 10/17
chart shows an entry zone caught later
Source: Barchart.com
that morning after the Fibonacci expan-
sion was re-applied. can place a target level on a chart visu- bull flags, triangles, ABCD patterns, etc.
Many traders struggle with drawing ally, holding for that target point is much When the momentum of a price move
Fibonacci levels properly, but even lev- easier than simply waiting for an upside breaking out of these periods of conges-
els that are not drawn ideally will yield move of indeterminate size. By seeing the tion is comparable to the impulse wave
strong support and resistance points. Fibonacci-based targets hit consistently heading into them, Fibonacci expansion
Indeed, if you pick a number of ran- over time, it makes it even easier to hold is most useful. These patterns can cre-
dom highs and lows in a security on positions into those target levels instead ate a great deal of choppiness, however,
which you base Fibonacci levels, many of jumping ship too early. before a breakout occurs. This can lead
of the resulting horizontal lines cluster traders to question whether or not their
together at certain price zones. These Price points anchor points are placed properly.
clusters are what traders use to distin- Fibonacci combines well with other strat- In the E-mini Dow trade, we look
guish major from minor support and egies, such as technical price pattern anal- at two different price points that
resistance. ysis. Typical price patterns in which the were used for the third anchor in the
Fibonacci expansion works well for Fibonacci expansion tool is particularly Fibonacci expansion. In the first chart
establishing price targets. When a trader useful are continuation strategies such as Trading Techniques: Hansen continued on page 35

futuresmag.com 29

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 you sell the call option, you can use part Short-term gains
of the premium you collected to buy a
put option with a strike price near your On Dec. 4, 2013, NLNK was trading above its 20- and 50-day SMAs before pulling back
initial entry. and offering a low-risk entry at $20.25. We also see a MACD cross just after entry.
If the unexpected happens, and the
stock falls apart, the put will protect
NLNK (Newlink Genetics Corporation)
you from a severe loss. As with any
Price history Moving average 50 Moving average 20 25.50
strategy the goal is to be mindful of
the downside. Sell DEC 22.50 call option here 24.00

In trading, there always will be 22.35

unknowns to deal with and the anxiet- 21.00
ies that come with them, but covered 19.50
call writing lets you transfer some of
18.00
that risk onto someone else. As with any
strategy, the goal is to be mindful of the 16.50
downside. With practice, it will help you
achieve predictable profitability while Williams %R 14
minimizing risk of loss. -18.28
-100.00
Billy Williams is a 20-year veteran trader and MACD 12 26 Exp Moving average 9
publisher of www.StockOptionSystem.com, 0.91
where you can read his commentary and 0.00
a report on the fundamental keys for the Sep Oct Nov
13 12/13/2013
aspiring trader.
FreeStockCharts.com

TrADInG TecHnIqueS continued

Hansen continued from page 29

in “Expanding opportunity,” you will as the 61.8% level that paused the origi- have yielded comparable price points as
find the most commonly used third nal breakout. targets. While the increased momen-
anchor: The low of the trading channel. The second chart includes an alternate tum on the breakout allowed the Dow
The 100% expansion of this move meant Fibonacci expansion based upon using the futures to push past the typical 100%
that the primary target would have been last low in the tightest portion of the con- expansion target, using the Fibonacci
15,249. Instead, the breakout move took gestion as the third anchor point. While expansion tool demonstrated that
the YM into the 138.2% expansion zone the absolute low is the most common we were working with the next target
of 15,294. third anchor, often a 100% expansion tar- zone, removing some guesswork from
There are several reasons for this get based upon this last pivot low tends to the trade.
larger price move on this particular hold most often when the pace of a break- While Fibonacci expansion is an excel-
breakout. First, the Dow congestion out move is similar to the pace or momen- lent tool to help traders visualize target
held within the middle of the original tum of the impulse move. This meant that points on continuation strategies, other
impulse wave of buying. This created 15,270 would be the most common target popular Fibonacci tools, such as retrace-
stronger resistance at the prior highs, going into a position such as this one. ments and fans, offer traders a similar
which you will note corresponded to Notice, however, that a number of the edge. The particular tool varies depend-
the 61.8% Fibonacci expansion level in Fibonacci resistance levels that result ing upon the type of strategy being trad-
the first chart. Second, once those highs from using the last low within the con- ed and whether or not you are timing an
broke, the pace of the buying was much gestion itself as the third anchor point entry or exit. Regardless, if you want to
stronger than the original impulse wave. are almost identical to those in the improve your trading and build consis-
When this is the case, it is more common first chart. The only difference is the tency in your models, Fibonacci expan-
for the breakout move to aim for higher percentage label attached to each level. sion is a solid tool to have.
expansion levels than 100%. The 38.2%, 76.4% and 123.6% Fibonacci
Alternately, if the breakout move had expansions in the second chart are each Toni Hansen is president and co-founder of
been slower than the original impulse within a few ticks of the 61.8%, 100% the Bastiat Group, Inc., DBA Trading From
wave, it may have been necessary to and 138.2% Fibonacci expansion levels Main Street. She can be reached through
adjust for a lower Fibonacci target, such in the first chart. Either method would her website www.tonihansen.com.

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