P1: PIC/PIC c04
August 18, 2008
Printer: Yet to come
HIGH PROBABILITY TRADING STRATEGIES FOR ANY MARKET AND ANY TIME FRAME
In this chapter, I teach you not only how to identify in advance which retracement level is likely to be the target for a trend reversal high or low, but some new and very important ratios to project the end of trends and corrections that are not typically used by most traders. In addition, you will learn unique and very effective ways to identify high probability price target zones to use for practical trade strategies. In this chapter, you will learn the difference between internal and external retracements and alternate price projections, and how together they identify not just support and resistance, but narrow-range price zones where corrections and trends usually end. Even if you are familiar with Fib retracements, don’t skip through this chapter as there should be a lot of new information for you. Prepare to take your price analysis to a whole new level with real-world, practical price trade strategies. I have taught this approach for almost two decades to all types of traders, from day traders to position traders and for all types of markets, including Forex, futures, stocks, exchange-traded funds (ETFs), and even mutual funds. I call this approach to price Dynamic Price Strategy. Why not just call it Fibonacci price strategies? For two reasons. One, we use some ratios that are not a direct part of the Fibonacci series but are just as important as the typical Fib ratios. And two, we use the ratios in ways other than the typical retracement approach usually taught. I have refined and simplified the Dynamic Price Strategy approach over the years to get to the core of practical, real-world price strategies that you can use for any market and any time frame. Let’s begin by learning internal retracements.
INTERNAL RETRACEMENTS AND CORRECTIONS There are two types of retracements: internal and external. The price retracements with which most traders are familiar are what I call internal retracements. If it is necessary to distinguish between internal and external retracements in this chapter, I will use the label In-Ret for internal retracements. Internal retracements are less than 100% and are primarily used to identify the price target to complete a correction. Even if you are familiar with so-called Fib retracements, don’t skip this section. I want to be sure we are on the same page with the language, terms, and specific ratios used with the Dynamic Price Strategy. The ratios used for internal retracements are .382, .50, .618, and .786. They are often expressed as a percentage. The first three ratios, .382, .50, and .618, are commonly called Fib retracements, although .50 is not actually a Fib ratio. The fourth ratio, .786, may be new to you unless you’ve taken some of my courses over the years. It is not a Fib ratio but is closely related and an important retracement ratio that should always be included; it is the square root of .618. I won’t go through the history of the Italian Fibonacci and the ratios named after him. The history and significance of the ratios is thoroughly covered in other trading and non-trading books. There is a huge body of trading and mathematical literature about Fibonacci numbers and ratios for those interested. The history is simply not relevant. I