Fibonacci Analysis (Bloomberg Financial) by Constance Brown
There are relatively few books specifically on the topic of Fibonacci Analysis (basically this one and Carolyn Boroden's text Fibonacci Trading: How to Master the Time and Price Advantage). Constance does a great job in this book of covering an area of technical trading that is for the most part has little coverage else where. After reading the book you will have the tools to understand how much weight you should give this type of analysis in your trading strategies.
An example of how to trade with such techniques can be found at Forbes who notes that NetFlix, Inc. (NFLX) from late 2008 and early 2009, however, similar Fibonacci relationships can be found in any liquid market. I have used it on commodities, stocks, mutual funds, and the forex market for many years and have found it to be quite valuable.
As you see can see, NFLX was in a downtrend in 2008 and made a closing low of $17.94 in October. Just a month later, it made a higher low of $18.60 (see line c). On December 8, NFLX surpassed the previous peaks (see line b). This suggests that a bottom might be in place. Given the gloomy outlook for the economy and the plunging stock prices at the time, however, buying anything may have been tough.
A stronger signal was given at the end of December when the downtrend from the April highs, line a, was broken at point 1. NFLX opened the following day at $28.27. Traders who went long on the opening may have used a stop under the recent lows at $26.82, while investors could have used Fibonacci analysis to determine their stop.
The rally from the lowest low ($17.94) to the close on the day the downtrend was broken ($28.66) was a difference of $10.72 ($28.66-$17.94). The most common Fibonacci ratios are 0.382, 0.50 and 0.618, which allows us to calculate the key Fibonacci support levels.
- 38.2% Support: $28.66 – (0.382 x $10.72) = $24.56
- 50% Support: $28.66 – (0.50 x $10.72) = $23.30
- 61.8% Support: $28.66 – (0.618 x $10.72) = $22.03
As a result, those who went long on the trend line break could have used a stop either under the 38.2% support at $24.56, or under the 50% support at $23.30. Because of the trend line break, a stop under the 38.2% support would have been wide enough so that if the breakout was legitimate, any pullbacks should be shallow.
I always give the stop some room under the Fibonacci level because others are also watching these levels. As a rule of thumb, you could use 0.5% of the stock price under the support, which in this example would be $28.66 x .005 = $.14. Thus, a stop at $24.42 ($24.56 – $.14) would have been fine.
Of course, buyers would have had to be watching NFLX very closely to observe this breakout, which might be unrealistic. Three days later, NFLX closed at $31.94 as it had gained over 10% in just three days, which was more likely to get your attention.
Categories:
Elliott,
Fibonacci,
Intermediate,
Time
For me is the best trading book i've ever read until today, but is not easy, you need to read it many times to master it's knowledge
does conctance brown conduct online seminar for us to fully understand her strategy ??