pr stewart fibonacci harmonic patterns jan09(1)

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  • 8/10/2019 PR Stewart Fibonacci Harmonic Patterns Jan09(1)

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    Fibonacci

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    Filius Bonacci, or Leonardo of Pisa,

    born in Pisa, Italy, in 1175 AD was calledthe "greatest European mathematician

    of the middle ages".

    He was one of the first people to introduce the Hindu-Arabic

    number system into Europe - the positional system we use

    today - based on ten digits with its decimal point and a

    symbol for zero:

    1 2 3 4 5 6 7 8 9 0

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    The area of his work we are most interested in is the Fibonacci series,

    In this series of numbers each term is the sum of the previous two terms.

    That is, if we take 0 and add 1 to it we get 1, 1+1=2, 1+2=3, 2+3=5, etc.

    We get the following series;

    0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233

    ..etc to infinity

    What Filius found interesting was what happens when we divide one number

    in the sequence into another number in the sequence.

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    The division of any two adjacent numbers gives the amazing Golden numbers

    34 / 55 = 0.618 or inversely 55 /34 = 1.618.

    We refer to these as Primary Ratios

    A similar thing happens when you divide any one number into the number two

    to the left and two to its right.

    eg..34, 55, 89

    34 / 89 = 0.382 or inversely 89 /34 = 2.618.

    These are Secondary Ratios

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    You will see that after the eighth sequence that the numbers become consistent at

    0.618, 1.618 and 0.382, 2.618

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    The numbers can be Negative

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    They dont have to start from Zero.

    They can be two random numbers spaced well apart

    And they still line line up around the 8th sequence

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    It is not so much the numbers that are important

    It is the difference between the numbers

    and more important again it is the

    Harmonics relationship of those differences.

    .as you would have seen a few slides back where we started withTwo random numbers

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    The Ratios appear through out

    Nature and the Solar Systems

    The question for us though is

    how do we use these numbers in

    determining probability of future price?

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    In a trending Market we get swings of

    Up trend Higher Highs and Higher Lows Down trend Lower Highs and Lowers Lows

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    We use the ratios to measure the fractional or percentage

    Retracements (B to C) of the Dip (A to B) to give a Projection for the

    priceExtension

    for a D point.

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    The combinations we are most interested in are

    Retracement Ratio Projection - Extension

    0.382 1.618 (2.618)

    0.50 1.618 (2.24)

    0.618 1.618

    0.707 1.414

    0.786 1.27

    0.886 1.13

    From these you can see that the smaller the price Retraces the higher it may

    Extend.

    It is also true that a 0.382 Retracement is likely to get to its 1.618 Extension in

    a quicker time than a 0.886 Retracement will Extend to a 1.13 Projection.

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    But how do we know what Fib level will result in a Price Reversal

    Warning..

    Focussing on one indicator we can

    mistakenly forget about the basics resulting in losses.

    Remember that- Fib Retracement and Extension levels are Support and

    Resistance levels. Using them on their own will leave you exposed.

    For maximum affect Fibs MUST be used with other indicators;

    Support and Resistance

    Horizontal Support and Resistance lines,

    Trend Lines,

    Moving Averages (both SMA and EMA)

    Candle Patterns and Psychology

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    The Pink Bearish down lines and Green Bullish up lines, show only two

    possible, of many different scenarios in price movement. The price can go

    anywhere.

    However it highlights the connection between ABCD swings and Support,

    Resistance and Trendlines.

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    Possible point for C at the POC of the

    FIB lines and the Trendlines

    0.50 Possibly but would require a very

    sharp increase in price

    0.382 looks more probable

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    Here we have a 0.382 Fib lining up with a Support/Resistance line & a

    price reaction at a Point Of Convergence with a down Trendline

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    The Extension from C to D seldom is a straight move. This is where most

    errors are made blindly expecting the D point to be pre determined.

    Remembernothing is absolute.

    Often the Extension will reverse

    Direction at the 1.27 or 1.13

    Always expect a reaction at each

    Fib Ratio and Projection and

    S/R and Trendline Breaks

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    Be mindful of Swing High and

    Swing Low Support and

    Resistance levels

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    The 1.27 level is often an indicator of a false channel break

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    Validation of Fib levels with other Fibs Fib Fishing

    A

    B

    C

    D

    a

    d

    c

    b

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    On the AUD 60 minute chart you can see that the last up trend line was broken.

    So we have drawn our down trend line and are now looking for trades on the short side.

    lets zoom out then

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    You can see that we have identified 1 complete down price swing labeled ABCD in red

    and have identified the A B in green of our second price swing.

    We will use this green price swing to pull our Fib from B to A.

    Pulling a Fib from B to A and we have identified a possible POC

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    Pulling a Fib from B to A and we have identified a possible POC

    with the down trend line and the 618 fib

    Now pull another fib from B to the highest high on this chart which was our A

    to see if we can identify a fib convergence.

    As you can see we have 3 fib convergences

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    As you can see we have 3 fib convergences.

    From the top down they are 618 / 786, 50 / 618 and 382 / 50.

    Ruling out the first convergence point leaves 2 possible areas the 50 / 618 and the 382 / 50

    as the first one possible is the 50 / 618 area I am favoring this as my POC for 'C' to form.

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    As we are aware of all the convergence points and for the sake of clarity will remove all

    lines except the Fib pull from the green B to A

    Zooming out again to use some support and resistance lines to confirm your thoughts.

    The Fib convergence with the 50 / 618 a down trend line and an excellent level of

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    The Fib convergence with the 50 / 618, a down trend line and an excellent level of

    resistance it looks like 0.7681 is the price area we are most interested in

    IF however, the down trend line is broken then we will wait for a re-test of the back side ofthat trend line.....

    We have a decisive bullish candle followed by an indecisive candle which is 2 parts of

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    We have a decisive bullish candle followed by an indecisive candle which is 2 parts of

    a Falling Star all we need now is a decisive bearish candle that closes down 50% of

    the body of the decisive bullish candle

    The high of this indecisive candle is 7678 and our POC is at 7681, only 3 pips away, ifwe get a confirmation after the completion of the next candle we will enter the trade.

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    We now have a decisive bearish candle (in relation to the indecisive candle).

    Entry on the beginning of the next candle @ 7672 we would have;

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    y g g @

    Stop Loss: 7693 (FS High of 7678 + 15 pips = 7693)

    Risk: 21 pips

    Limit 1: 7640 ( Risk = 21 x 1.5 = 32 pips).

    Limit 2: 7629 (D = 1.618 = 7619 backed off 10 pips)

    Potential reward: Limit 1: 32 pips Limit 2: 43 pips

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    Looking good so far.

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    Limit 1 has been achieved

    Moved our stop to Entry on the balance of the trade and are now trading risk free while

    our trade continues our way.

    Limit 2 has now been achieved and the trade is closed.

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    Trade results:

    Limit 1 achieved: 32 pips profitLimit 2 achieved: 43 pips profit

    E l f T d Li B k

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    Example of a Trend Line Break

    We have pulled 3 sets of Fibs from the Blue 'B' high You can see that we have a Fib

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    We have pulled 3 sets of Fibs from the Blue 'B' high. You can see that we have a Fib

    convergence with a 0.382, 0.50 and 0.786. This level is also a level of Support. Giving

    us a potential 'C' (Blue 'C').

    BUT as we have a Trend line break we then look at the potential down move,

    so we will pull a Fib from the Blue 'C' low which we will now label red 'b' to the Blue 'B'

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    so we will pull a Fib from the Blue C low which we will now label red b to the Blue B

    high which we will label red 'a'.

    we will now wait to see if we get a reaction at one of the Fib levels......

    You can now see we have a Shooting Star (4 pips from our 382)

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    You can now see we have a Shooting Star (4 pips from our 382).

    It is also a previous level of resistance and also a perfect bounce off the backside of

    the up trend line. We have a Backside of trend line bounce, a Fib 382, previous level ofResistance, and a perfect Shooting Star, we now have our signal to go short.

    Also note that we had Tweezer Tops at this level on the 30 minute chart.

    Remember that the price often reacts at the 1.27

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    I have split my available equity and placed 2 limits

    one Limit short of 1.27 @ 0.7654 - the other short of the 1.618 @ 0.7637

    Notice the Trendline

    Our Limit 1 has been achieved for a profit of 33 pips

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    Our Limit 1 has been achieved for a profit of 33 pips

    We have now moved our stop to Entry / Break Even on the remainder of the trade

    The next candle takes out Limit 2 completing our trade.

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    Trade results:

    Entry: 7687

    Limit 1: 7654 Profit: 33 pipsLimit 2: 7637 Profit: 50 pips

    Total profit: 83 pips (in 2.5 hours)

    Remember the Trendline

    Notice after the red 'a b c d' down move is completed the AUD managed to find good

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    Notice after the red a b c d down move is completed, the AUD managed to find good

    support at the outer up trend line and provided a strong rally.

    Point to note, is that the rally was inspired by the release of the Australian Federal

    Budget...... Isn't it interesting that Technical Analysis showed what the market would do

    prior to the release of the Budget.

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    The following information on Harmonic Patterns is taken with

    permission from ..

    All trends must end and eventually reverse

    This is where Harmonic trading with Fib levels steps up.

    At this point you are aware that you can pull Fibs in any time frame

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    Each time frame will have Fibs pulled in different directions

    to each other

    Within a single time frame you can apply Fibs in both directions

    And this is when it gets very interesting

    You will start to see patterns developing with retracements and

    projections or reverse drawn fibs lining up with each other

    You can see Trend Reversal points with more confidences

    and not just Trend Continuations

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    The 5-0 pattern was the beginning of Harmonic Trading

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    The Bullish 5-0 starts at the 0 point, representing

    an extended down leg to begin the pattern at X.

    The initial point X acts as the low of this prior

    substantial decline. After a quick reactive

    bounce to the A point, the structure abruptly

    continues the decline, only to find supportslightly past the prior low at X.

    This is the failed wave 3 or wave 5 - in Elliot

    Wave terms - that establishes the rest of the

    structure.

    However, the important limits from the Harmonic

    Trading perspective requires that this X, A

    extension be at least a 1.13 but not greater than

    a 1.618.

    After that impulsive failed wave is established, the BC leg rallies to at least a 1.618

    extension of the AB length but it does not exceed 2.24.

    Again, this tight range of 1.618-2.24 is a defining element of the structure. If the 1.618

    limit is not reached, the structure is not a valid 5-0.

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    Butterfly Followed by a Gartley

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    We covered..

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    HowRatios

    andProjections

    are defined

    The relationship between Retracements and Extensions/Projections

    The importance of using Support, Resistance and Trendlines to

    support Fib information

    Always using Candle Psychology to confirm Trade decisions

    Look for Fibs within larger Fibs Large ABCD and smaller abcd to

    determine probability of one Fib level over another and to determine

    the strength of a possible price move

    Using Harmonics to have advanced knowledge of a possible Trend

    Reversal

    Most important

    NOT to take anything as given or absolute.

    You are trading Probability (not Predictions) so you will get some

    wrong. Accept it and precondition your self for it.

    Thank you

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    y

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