The Fibonacci Effect. How To Trade Using Fibonacci, Elliot Wave & Zig Zag Projections. by: Lan H. Turner

Transcription

1 The Fibonacci Effect How To Trade Using Fibonacci, Elliot Wave & Zig Zag Projections 1. Count (Elliott Waves) 2. Measure (Fibonacci) 3. Setup (Prepare to Enter) 4. Trigger (Enter) 5. Follow Through (Exit) by: Lan H. Turner

2 Copyright 2013 PitNews Press All Rights Reserved

3 Table of Contents Chapter One Introduction 1 Chapter Two Patterns 15 Chapter Three Elliot Wave 67 Chapter Four Fibonacci 91 Chapter Five Zig Zag 107

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5 Introduction About the Author Lan H. Turner: President and CEO of Gecko Software, Inc. For seven years, Mr. Turner was the President of his own international computer communications and marketing firm before selling it to dedicate himself full time to the advancement of futures and options software applications, training, and new trader support. After completing four years of education at the University Level, he began his professional career as a full-time Senate staff member in Washington D.C. He then became a buyer of computer equipment for the US Navy and National Library of Medicine in D.C. Later, after several years as a successful Federal Government Contracts Consultant, he began his own import/ export computer communications firm. With years of successfully trading stocks under his belt, he finally made the leap into trading commodities in Due to the fact that he so enjoyed trading the commodities market, he started his first website called ThePitMaster.com. He later went on to establish the software engineering firm, Gecko Software, Inc.; PitNews.com; and his flagship product, Track n Trade. Mr. Turner is not a licensed commodities broker or CTA, he is just a trader who has dedicated himself to trading and educating others of the wonders of trading the Stocks, Forex, and Futures and Options markets. Mr. Turner is married and has two young boys who he s been teaching every aspect of trading; he hopes one day that they too will love trading as much as he does. Although Mr. Turner very much enjoys flying his airplane, he s also an avid snowboarder, four wheeler, and motorcycle enthusiast. Mr. Turner also enjoys working on his small Utah ranch where he raises sheep, but his all-time favorite pastime is still staying up late and trading on Track n Trade. Be sure to visit some of Mr. Turner s favorite websites: - TracknTrade.com - TradeMentors.com - StockAnnual.com - GeckoSoftware.com - Chartbook.com - TNTSeasonals.com - PitNews.com - LanTurner.com - TheWall.PitNews.com 1

6 Fibonacci, Elliot Wave, & Zig Zag Trading Methodologies Speculators have two dominating thoughts of trading methodology: Technical Trading and Charting Fundamental and Seasonal trading Traders often exhibit religious fervor over their desired trading methodology. Technical analysts watch for recurring price patterns reflected in the movement of charts. Fundamental traders study the overall economic outlook for a particular market. The Basics of Technical Analysis Technical analysis is the study of price behavior. All known factual information regarding production and consumption are reflected by price. Therefore, technical analysts believe the behavior of price yields more pertinent information of market direction than studying the fundamental reasons behind price movement. Annual & Perpetual Markets Annually produced commodities have supply available at one time, yet demand is spread throughout the year. Perpetually produced commodities have supply available throughout the year, yet demand tends to peak at particular times. Why Trade Futures? Take a look at the two charts above. At first glance, they look very similar. After taking a closer look, we realize that these are actually two very different markets, yet they look almost exactly the same. What s going on here? Let s analyze chart number one in a little more detail. This chart is what is known as the Q s. As a savvy stock market guru, the symbol you would use to look-up this market would be QQQQ. You hear the financial television talking heads throw around this market symbol almost every single day. It s as common in their language as is football, basketball, or baseball to the average guy. 2

7 Introduction What are the Q s? Well, the Q s are nothing more than a way of trading the NASDAQ- 100 Index. Oh great, that helps, what s the NASDAQ-100 Index? The NASDAQ-100 Index is a collection of stocks all gathered up and added together into one chart, very similar to a mutual fund, or in this case, a stock fund. Simply put, it is a composite price of the largest 100 domestic and international non-financial companies listed on The NASDAQ Stock Market. (In stock trader lingo, it s known as an ETF, or Exchange Traded Fund.) Take a close look at this chart and you ll notice that you trade this market just like you would any other individual stock. Notice the last move. It started at when we received a buy signal from our Stochastics Indicator, and it ended at when we received our sell signal from our Stochastics Indicator. The profit from this move was $2,620.00, and the initial investment required to obtain that size of a financial reward was $28,281.00, or 774 shares of the Q s. A sizable chunk of change, wouldn t you say? Okay, that was boring. Are you ready for some excitement? Take a look at the next chart. 3

8 Fibonacci, Elliot Wave, & Zig Zag What s wrong with this picture? This is exactly the same chart right? Wrong! This is the NASDAQ-100 Mini contract traded on the Chicago Mercantile Exchange in Chicago. The first chart, the Q s, is traded on the New York Stock Exchange. Let me tell you something, these boys in Chicago know how to trade. Look at this chart: the exact same move in the NASDAQ, as the Q s, started when our stochastics indicator gave us a buy signal at , and it ended when the Stochastics Indicator gave us a sell signal at The amount of profit on that trade was exactly the same as our example above with the Q s, but take a look at that initial investment amount! Only $3,750.00! What s that you say? An initial investment of only $3, on the futures market profits the exact same amount of money as a $28, investment on the stock market? (How long did that take? Oh, sorry, that trade took about 15 days.) 4

9 Introduction Getting Started 1st - Setup Price pattern and/or indicator 2nd - Trigger Break out of pattern, and/or a buy/sell signal from indicator 3rd - Follow Through Risk and money management strategies 1st Setup Locate and Identify Price Pattern/Formations. What is a Recurring Price Pattern? Analyze the chart for technical formations and patterns like the narrow sideways channel, top and bottom, flag, triangle, wedge, etc. 5

10 Fibonacci, Elliot Wave, & Zig Zag Visit: to Download Disc One Select Patterns and click on Get Started. Play Video 1: Recurring Price Patterns. This is a fun video that demonstrates the concepts behind identifying recurring price patterns in the financial markets. After you finish this video, we will dive into examples of Price Patterns with chart examples and build from there. Enjoy! What you think you see......is not always really there. Simple recurring price patterns can be your most profitable strategy. 6

11 Introduction Impractical Tools......produce impractical results. 7

12 Fibonacci, Elliot Wave, & Zig Zag What I see......may not always be what I see. Do you see the young woman or the old lady? Chart pattern recognition......is an art, not a science. 8

13 Introduction What appears to be black......may actually be white. What appears to be noise to you......may be a profit opportunity to me. 9

14 Fibonacci, Elliot Wave, & Zig Zag What appears to be impossible......is simply a matter of knowledge. 10

15 Introduction Recurring price patterns......have a distinct set of rules to learn. Learning to trade the markets... 11

16 Fibonacci, Elliot Wave, & Zig Zag...is learning to see what other s can t. Head & Shoulders Formation... Anticipate a change in market momentum on a break above/below the Neckline. 12

17 Introduction Sometimes you have to think outside the box to understand what s actually inside the box. Is the red dot inside the box or outside the box? 13

18 Fibonacci, Elliot Wave, & Zig Zag 14

19 Pattern Recognition Pattern Recognition Let s take a closer look at recurring price patterns and how to recognize them in your charts. On the CDROM, take a look at the Recurring Price Patterns and watch Video 2: Recurring Price Patterns. Follow along through this section. In the front of your workbook you will find a Charting Techniques quick reference guide for each type of formation. The Basics: What is a trend? An up-trending, or bullish market, exhibits higher highs and higher lows. A down-trending, or bearish market, exhibits lower highs and lower lows. A sideways market, or neutral market, exhibits no definable trend. 15

20 Fibonacci, Elliot Wave, & Zig Zag 16

21 Pattern Recognition Formations: Pattern #1 Support A horizontal line (floor) which has acted as a barrier to lower prices. Usually defined by two or more pirce bar lows. Resistance A horizontal line (ceiling) which has acted as a barrier to higher prices. Usually defined by two or more price bar highs. After each formation is explained in the video, press pause and try the following exercise. 17

22 Fibonacci, Elliot Wave, & Zig Zag Pattern Exercise 1: Find the Support and Resistance areas on this chart. 18

23 Pattern Recognition Turn the page to see the Support and Resistance areas. Press play. 19

24 Fibonacci, Elliot Wave, & Zig Zag Pattern Exercise 1: Take a look at the areas of support and resistance. Did you see all these, as well? 20

25 Pattern Recognition Formations: Pattern #2 Inclining Trendline A straight line usually drawn to define an uptrend against or through price bar lows. Declining Trendline A straight line usually drawn to define a downtrend against or through price bar highs. After each formation is explained in the video, press pause and try the following exercise. 21

26 Fibonacci, Elliot Wave, & Zig Zag Exercise 2.1: Find the Inclining and/or Declining Trendlines on this chart. 22

27 Pattern Recognition Turn the page to see the Inclining and/or Declining Trendlines. Press play. 23

28 Fibonacci, Elliot Wave, & Zig Zag Exercise 2.1: Did you see this Inclining Ttrend? 24

29 Pattern Recognition Exercise 2.2: Find the Inclining and/or Declining Trendlines on this chart. After the example is explained in the video, press pause and try the above exercises. 25

30 Fibonacci, Elliot Wave, & Zig Zag Press play. Exercise 2.2: Did you see this Declining Trend? 26

31 Formations: Pattern #3 Pattern Recognition Inclining Channel An up-trending price bar pattern in which inclining parallel lines can be drawn through or against price bar highs and lows respectively. Declining Channel A down-trending price bar pattern in which declining parallel lines can be drawn through or against price bar highs and lows respectively. After the example is explained in the video, press pause and try the following exercises. 27

32 Fibonacci, Elliot Wave, & Zig Zag Exercise 3: Find the Support and Resistance Channel areas on this chart. 28

33 Pattern Recognition Turn the page to see the Support and Resistance Channels. Press play. 29

34 Fibonacci, Elliot Wave, & Zig Zag Exercise 3: Did you see these two inclining channels? 30

35 Pattern Recognition Formations: Pattern #4 Narrow Sidways Channel A formation that features both resistance and support. Support forms the low price bar, while resistance provides the price ceiling. Chartists frequently buy on a break up and out of the Channel or sell on a break down and out of the Channel. Non-Symmetrical Triangle A formation in which the slopes of price highs and lows are converging to a point so as to outline the pattern in a non-symmetrical triangle. To trade this formation, place a buy order on a break up and out of the triangle or a sell order on a break down and out of the triangle. 31

36 Fibonacci, Elliot Wave, & Zig Zag 32

37 Pattern Recognition After the example is explained in the video, press pause and try the following exercises. Exercise 4-1: Find the Narrow Sideways Channel on this chart. 33

38 Fibonacci, Elliot Wave, & Zig Zag Press play. Did you see this one? Watch what happens when the market breaks out of the channel. 34

39 Pattern Recognition 35

40 Fibonacci, Elliot Wave, & Zig Zag After the example is explained in the video, press pause and try the following exercises. Exercise 4-2: Find the Non-Symmetrical Triangle on this chart. 36

41 Pattern Recognition Turn the page to see the Non-Symmetrical Triangle. Press play. 37

42 Fibonacci, Elliot Wave, & Zig Zag Did you see this Triangle? Watch the market break out of this Non-Symmetrical Triangle 38

43 Pattern Recognition Formations: Pattern #5 Symmetrical Triangle A formation in which the slopes of price highs and lows are converging to a point so as to outline the pattern in a symmetrical triangle. To trade this formation place a buy order on a break up and out of the triangle or a sell order on a break down and out of the triangle. Pennants Similar to a Symmetrical Triangle but generally not as elongated. The slopes of price bar highs and lows are converging to a point so as to outline the pattern in a symmetrical triangle. To trade this formation, you can place orders at both the break up and out of the pennant and break down and out of the pennant. 39

44 Fibonacci, Elliot Wave, & Zig Zag After the example is explained in the video, press pause and try the following exercise. Exercise 5: Find the Symmetrical Triangle or Pennant on this chart. 40

45 Pattern Recognition Turn the page to see the Symmetrical Triangle and/or Pennant. Press play. 41

46 Fibonacci, Elliot Wave, & Zig Zag Exercise 5: Did you see this Symmetrical Triangle? Symmetrical Triangle 42

47 Pattern Recognition Formations: Pattern #6 Descending Triangle A formation in which the slopes of price highs and lows come together at a point outlining the pattern of a Right Triangle. The hypotenuse in a Descending Triangle should be sloping from higher to lower and left to right. To trade this formation, place a buy order on a break up and out of the triangle or a sell order on a break down and out of the triangle. Descending triangles, with a prior uptrend, are anticipated to break up and out rather than down and out. Rising or Inclining A formation in which the slopes of price highs and lows come together at a point outlining the pattern of a Right Triangle. The hypotenuse in an Ascending Triangle should be sloping from lower to higher and from left to right. To trade this formation, place a buy order on a break up and out of the triangle or a sell order on a break down and out of the triangle. Ascending triangles, with a prior downtrend, are anticipated to break down and out rather than up and out. 43

48 Fibonacci, Elliot Wave, & Zig Zag 44

49 Pattern Recognition After the example is explained in the video, press pause and try the following exercise. Exercise 6: Find the Symmetrical Triangle on this chart. 45

50 Fibonacci, Elliot Wave, & Zig Zag Press play. Exercise 6: DId you see this Symmetrial Triangle? 46

51 Pattern Recognition Formations: Pattern #7 Ascending Triangle This formation occurs when the slopes of price bar highs and lows join at a point forming an inclining wedge. The slope of both lines is up, with the lower line being steeper than the higher one. To trade this formation, place an order on a break up and out of the wedge or a sell order on a break down and out the wedge. Rising wedges, with a prior downtrend, are anticipated to break down and out rather than up and out. Falling or Declining This formation occurs when the slopes of price bar highs and lows join at a point forming a declining wedge. The slope of both lines is down, with the upper line being steeper than the lower one. To trade this formation, place an order on a break up and out of the wedge or a sell order on a break down and out the wedge. Falling wedges, with a prior uptrend, are anticipated to break up and out rather than down and out. 47

52 Fibonacci, Elliot Wave, & Zig Zag 48

53 Pattern Recognition Formations: Pattern #8 Bull Flag A formation consisting of a small number of price bars where the slopes of price bar highs and lows are parallel and declining. Bull Flags are identified by their characteristic pattern and by the context of the prior trend. In the case of a Bull Flag, the trend leading to the formation of the Bull Flag is up. To trade this formation, place orders on the break up and break down points, leaving your unfilled order as your stop loss. Bear Flag A formation consisting of a small number of price bars in which the slopes of price bar highs and lows are parallel and inclining. Bear Flags are identified by their characteristic pattern and by the context of the prior trend. In the case of a Bear Flag, the trend leading to the formation of the Bear Flag is down. To trade this formation, place buy and sell orders on the break up and down of the flag, leaving the unfilled order as your stop loss. 49

54 Fibonacci, Elliot Wave, & Zig Zag 50

55 Pattern Recognition Formations: Pattern # (A-B-C) Top Anticipates a change in trend from up to down on a break below the number 2 point (A-B-C) Bottom Anticipates a change in trend from down to up on a break above the number 2 point. 51

56 Fibonacci, Elliot Wave, & Zig Zag 52

57 Pattern Recognition 53

58 Fibonacci, Elliot Wave, & Zig Zag 54

59 Pattern Recognition Formations: Pattern #10 Head and Shoulders Top Anticipates a decline on a break below the Neckline. Head and Shoulders Bottom Anticipates a change in trend from up to down. 55

60 Fibonacci, Elliot Wave, & Zig Zag 56

61 Pattern Recognition 57

62 Fibonacci, Elliot Wave, & Zig Zag After the example is explained in the video, press pause and try the following exercise. Pattern Exercise 10: Find the Head and Shoulders formation on this chart. 58

63 Pattern Recognition Turn the page to see the Head & Shoulders Formation. Press play. 59

64 Fibonacci, Elliot Wave, & Zig Zag Press play. Head & Shoulders Formation See the market break out right at the neckline 60

65 Pattern Recognition Formations: Patterns #11 & 12 Double Top Anticipates a change in trend from up to down. Double Bottom Anticipates a change in trend from down to up. Triple Top Anticipates a change in trend from up to down. Triple Bottom Anticipates a change in trend from down to up. 61

66 Fibonacci, Elliot Wave, & Zig Zag 62

67 Pattern Recognition Now that you have been introduced to all the different technical analysis formations, take a look at this chart and all the differnt patterns below: You ll be amazed at how these different patterns will start popping off the chart as you look at them! 63

68 Fibonacci, Elliot Wave, & Zig Zag Determine the Best Method of Market Exit Once you are in the market, it is just as important to have your method of exit setup. Consider if you are going to follow with stop loss orders or exit when target areas of profit have been hit. Take a look at this order and how it is set up. Take some of your profits along the way. Here we go - we re in the market going short! 64

69 Pattern Recognition So we started out Short and took the first bit of profit at the level. We have another order waiting at Don t forget to protect yourself - see the two stop orders at 80.79? Notice that they were put right behind the two points of resistence. Change stop to one order. Just short one contract and we have taken a little profit. 65

70 Fibonacci, Elliot Wave, & Zig Zag Follow the market with your stop on resistance marks. When the market turns to go up, you get out on your last stop order. Know how the trade is going to go before you place your first order, then take profits along the way. Be sure to always follow with stop orders. 66

71 Elliot Wave Let s add to what you ve learned! Fibonacci Numbers & Elliott Wave Theory or Lore? There are no calculable recurring events within the financial trading markets, and all price action is random. Every moment of trading is a series of chaotic events that return incalculable results. Fibonacci & Elliott Wave Theory This is where the Fibonacci sequence and Elliott Wave theory come into play and help us make sense out of chaos. Two Technical Trading Camps - Elliot Wave Technicians - Fibonacci Golden Ratio Technicians The Power of Track n Trade In Track n Trade we have several tools based on the Fibonacci sequence, or the Fibonacci numbers as they are generally referred to as. We ve designed our tools to help you create a dynamic combination with these two very powerful theories. 67

72 Fibonacci, Elliott Wave, & Zig Zag Elliott Wave Theory Elliott Wave Theory interprets market momentum in terms of three basic recurring price structures: - Pattern - Ratio - Time Market cycles are composed of two major types of Wave: - The Impulse Wave - The Corrective Wave Every wave structure can be divided into five basic waves, or movements within a given market. During an uptrend, waves 1, 3, and 5 are advancing waves. Waves 2 and 4 are corrective waves. Rule of thumb: - Wave 2 should not break below the beginning of wave 1 - Wave 4 should not retrace back any further than advancing wave number 1 After the pinnacle, or peak, of the fifth wave, we proceed to get three additional corrective waves: retracements A, B, and C. 68

73 Elliot Wave Elliott + Fibonacci = The Key! The reason this is important is because Elliott asserted that these counter-trend waves will usually retrace back against the Fibonacci sequence of numbers by: , 50 and 61.8 percent - And frequently by 24 and 76 percent Elliott Wave is Fractal We find Elliott Waves on long-term monthly charts as well as weekly charts, daily charts, and intraday charts. We also see smaller waves within larger waves on each scale. 69

74 Fibonacci, Elliott Wave, & Zig Zag Patterns Within The Elliott Wave Inclining Channel 123 Bottom Formations 123 Top Formations 70

75 Elliot Wave Triangle Formations Head & Shoulders Top Formation Andrew s Pitchfork Formation Speed Fan 71

76 Fibonacci, Elliott Wave, & Zig Zag Gann Fan Fibonacci Time Zone Fibonacci Arc 72

77 Elliot Wave Fibonacci Predictions (A,B,C,D) Fibonacci Projections This section will give you practice in identifying Elliott Waves in charts. Once you can find the Elliott Waves, you will be ready to move on to applying Fibonacci Retracements to project and manage your trade. Then we will teach you how to use the Zig Zag tool to confirm your Elliott Waves. Let s get started! Watch Video 2: The Perfect Elliott Wave in the Elliott Wave section. Look at the Elliott Wave price patterns and then watch Video 3: Identifying the Elliott Wave in a Chart. During the video you will have exercises where you will identify the Elliott Wave. Be sure to pause the video when a new chart is opened so you can practice before you get the answer. Turn the page to start the exercises. 73

78 Fibonacci, Elliott Wave, & Zig Zag Elliott Wave Exercise 1: Find the Elliott Wave Pattern. 74

79 Elliot Wave Turn the page to see the Elliott Wave Pattern. 75

80 Fibonacci, Elliott Wave, & Zig Zag Elliott Wave Exercise 1: Did you see this one? 76

81 Elliot Wave Elliott Wave Exercise 2: Find the Elliott Wave Pattern. 77

82 Fibonacci, Elliott Wave, & Zig Zag Elliott Wave Exercise 2: Did you see this one? 78

83 Elliot Wave Elliott Wave Exercise 2: How about this one? There s actually a double wave. 79

84 Fibonacci, Elliott Wave, & Zig Zag Elliott Wave Exercise 3: Find the Elliott Wave Pattern. 80

85 Elliot Wave Turn the page to see the Elliott Wave Pattern. 81

86 Fibonacci, Elliott Wave, & Zig Zag Elliott Wave Exercise 3: Did you see this one? 82

87 Elliot Wave Elliott Wave Exercise 4: Find the Elliott Wave Pattern. 83

88 Fibonacci, Elliott Wave, & Zig Zag Elliott Wave Exercise 4: Did you see this one? 84

89 Elliot Wave Elliott Wave Exercise 5: Find the Elliott Wave Pattern. 85

90 Fibonacci, Elliott Wave, & Zig Zag Elliott Wave Exercise 5: Did you see this one? 86

91 Elliot Wave Elliott Wave Exercise 6: Find the Elliott Wave Pattern. 87

92 Fibonacci, Elliott Wave, & Zig Zag Elliott Wave Exercise 6: This is a tricky one it s a Reverse Wave Pattern. 88

93 Elliot Wave Elliott Wave Exercise 7: Find the Elliott Wave Pattern. 89

94 Fibonacci, Elliott Wave, & Zig Zag Elliott Wave Exercise 7: Did you see this one? 90

95 Now we ll apply Fibonacci s principles to this pattern. Take a look at the Fibonacci Section on Disc #1 and follow along with the workbook. Fibonacci Fibonacci Introduction I want to give you a simple introduction to the basics of Fibonacci where it came from, where we find it in nature and science, and why it is important. I will focus on how we translate and use the Golden Ratio to help us predict movement within the financial markets. This mathematical model is named the Fibonacci Golden Ratio because it was developed, or discovered, you might say, by a famous medieval Italian mathematician who lived around 1170 AD, and his name was Leonardo Fibonacci. Fibonacci Sequence The Fibonacci sequence is a series of numbers which are generated by a simple math formula that has been adapted to a number of uses that have to do with putting order to chaos. It is still found in different areas of mathematics and science today. It looks like this: 0, 1, 1, 2, 3, 5, 8, 13, and continues on forever. The simple formula that creates this string of numbers looks like this: 0+0=0, 0+1=1, 0+1=1, 1+1=2, 1+2=3, 2+3=5, 3+5=8, 5+8=13, and so on. All we do is simply add the last two numerals to get the next numeral. This is the Fibonacci sequence. We use the Fibonacci sequence to obtain what we call the Golden Number. It s the Golden Number that we use most often in our trading endeavors. Knowing how we obtained the Golden Number is only a matter of academic exercise and background knowledge. In Track n Trade, we ve done the math for you behind the scenes and provided you with the tools necessary to make those calculations easily. Learning how to use those tools is the real key, and it will be discussed at a later point in this workbook. Here s how we obtained the all important Golden Number from which all Fibonacci Trading and market retracements and projections are based. Mathematically speaking, we take the ratio of two successive numbers in the Fibonacci series: (1, 1, 2, 3, 5, 8, 13 ) 1/2 = 1, 2/1=2, 3/2=1.5, 5/3= /5 = 1.6, 13/8=1.625, 21/13= The division of any two adjacent numbers gives the amazing Golden Number: - 34/55 = or inversely 55/34 = Therefore, if you have a segment of a line divided at.618 of the total distance of the line, the ratio of the small segment to the larger segment is the same as the ratio of the larger segment of the entire line. This ratio is known as the Golden Ratio or the Golden Mean. 91

96 Fibonacci, Elliot Wave, & Zig Zag It s easier to see what is happening if we plot the ratios on a graph. Notice that the numbers start to settle in on one particular value, We call this value The Golden Ratio or The Golden Number. So, next time someone asks you what the answer is to all the world and the universe, it s not 76 as we ve all been led to believe, it s , or rounded down to a manageable size, This number is often represented by the Greek symbol of Phi. Fibonacci Ratio Why is this important? The argument is that everything in nature appearing to be chaos is actually something other than chaos. It is function and form, based upon Fibonacci s magical golden number. This mathematical ratio is found in many places of nature. If we take a close look at our own human body, we find that it is also found in many proportions, such as the distance from the ground to the navel to the top of the head of a woman. On a man, it is the ratio of the distance from his waist to the top of his head to the tip of his outstretched fingers. (As exampled in the famous drawing by Leonardo de Vinci to the left.) Golden Ratio & Nature The Fibonacci Ratio can also be found in nature. If the ratio is turned into a spiral, it is the mathematical ratio of the spiral of a galaxy, the curl of a wave, the curl of a ram s horn, or even a simple sea shell. Golden Ratio Spiral Bernoulli Spiral Logarithmic Spiral Equiangular Spiral It has been called many things, but the important thing to remember is that whatever it s called, the mathematical algorithm which describes how these spirals are created comes from this simple yet very powerful and complex math formula. On many plants, the number of petals is a Fibonacci number: buttercups have 5 petals, lilies and iris have 3 92

97 Fibonacci petals, some delphiniums have 8, corn marigolds have 13 petals, some asters have 21, and daisies can be found with 34, 55, or even 89 petals. 3 petals: Lilies often have 6 petals formed from two sets of 3. 4 petals: Very few plants show 4 petals (or sepals) but the Fuchsia do. Four is not a Fibonacci number! 5 petals: Buttercup, Wild Rose, Larkspur, Columbine (Aquilegia), and Pinks. 8 petals: Delphiniums 13 petals: Ragwort, Corn Marigold, Cineraria, and some Daisies. 21 petals: Aster, Black-eyed Susan, Chicory 34 petals: Plantain, Pyrethrum 55, 89 petals: Michaelmas daisies, the Asteraceae family. Some species are very precise about the number of petals they have, like Buttercups, but others have petals that are very near those above, with the average being a Fibonacci number. Here are some more examples of the Fibonacci Ratio in nature: The Fibonacci Ratio, being a part of nature, also affects things which are determined by human action. Look at your own hand you have: 2 hands, each of which has 5 fingers, each of which has 3 parts separated by 2 knuckles. Is this a coincidence or not? Also, measure the lengths of the bones in your fingers. You will find they follow the same rule. We also find the Fibonacci Ratio in many other proportions of the human body. On a women, it s manifested as the distance from the ground to the navel to the top of her head. On a man, it is the ratio of the distance from his waist to the top of his head to the tip of his outstretched fingers. 93

98 Fibonacci, Elliot Wave, & Zig Zag Let Us Simplify The Math Gecko Software s Track n Trade Pro Fibonacci ruler has been designed to calculate the Elliott wave retracement levels against the Fibonacci Golden Ratio and Time sequence within any given trend. We ve done the math for you, so you don t have to. In Track n Trade, we have several tools based on the Fibonacci sequence, or the Fibonacci numbers as they are generally referred to as. The first tool that we will cover is the Fibonacci Ruler. This tool gives you retracements, predictions, projections, and time zones, based on these numbers and formulas that you just learned about. You can forget about all the Math; we ve done it for you! Fibonacci Retracement Markets have a tendency to retrace 50% of the last move. A more accurate level of retracement can be seen by using the Fibonacci ruler retracement levels of: 23.6%, 38.2%, 50%, 61.8%, 78.6%, 100% For every action, there is an opposite and equal reaction; Fibonacci ABCD pattern. So if markets have a tendency to retrace 50% of the last move, why is it important to establish retracement levels? 94

99 Fibonacci 95

100 Fibonacci, Elliot Wave, & Zig Zag 96

101 Fibonacci 97

102 Fibonacci, Elliot Wave, & Zig Zag Fibonacci Price Patterns Watch the video Fibonacci Patterns, Newton s Tool and more. This video covers the Fibonacci Patterns, Newton s Tool, and how to identify and use them in your charts. 98

103 Fibonacci Fibonacci Price Patterns 99

104 Fibonacci, Elliot Wave, & Zig Zag Fibonacci Price Patterns 100

105 Fibonacci Fibonacci / Elliott Patterns Within Patterns 101

106 Fibonacci, Elliot Wave, & Zig Zag Newton s Law For every action, there is an equal and opposite reaction. Fibonacci Projections Newton s Prediction 102

107 Newton/Fibonacci Prediction Fibonacci Watch Video 1: Using the Fibonacci Ruler. This is a tool that is based on the numbers and formulas that you just learned about. Fibonacci Extensions - Chart 1 103

108 Fibonacci, Elliot Wave, & Zig Zag Fibonacci Extensions - Chart 2 Fibonacci Time Zones 104

109 Fibonacci Fibonacci Price & Time Zones Fibonacci Extensions - Chart 1 105

110 Fibonacci, Elliot Wave, & Zig Zag Fibonacci Extensions - Chart 2 Watch the training videos at the end of the Fibonacci section on Disc #1 to see the Elliot Wave/Fibonacci combination in action. There will be 15 videos in the first section, and then you will have a trading examples section that will put everything we have learned so far together in trades. Training Videos -Using Elliott Wave and Fibonacci Together This is a series of short clips that show you how to set up your Fibonacci Tools and apply them to your Elliott Wave charts. - Trading Examples Number 1: Elliott Wave and Fibonacci in Crude Oil Number 2: Elliott Wave and Fibonacci in Gold Number 3: Elliott Wave and Fibonacci in Canadian Dollar (with CCI Indicator) Number 4: Elliott Wave and Fibonacci in in Soybeans (with MACD Indicator) 106

111 Reference Indicators for Added Confirmation Before we get into using the Zig Zag Indicator, let s talk about indicators in general. Using Indicators as a method of confirming your other thought processes is a prudent way of reassuring yourself you are on the right track. Zig Zag Using indicators alone as a method of market entry and exit is a sure-fire way to give up your holdings to someone else. Introduction to Indicators COT - Commitment of Traders Plug-in SEAS - Seasonals Indicator Plug-in Zig Zag - Zig Zag Indicator (Fibonacci) AD - Accumulation & Distribution CCI - Commodity Channel Index DMI - Directional Movement Index MACD - Moving Average Conv./Div MOM - Momentum MOM(A) Average %R - Williams Percent R RSI - Relative Strength Index STO - Stochastics, Fast & Slow Understanding The Market Why do we have futures exchanges? - Help producers sell their goods - Help consumers receive access to goods Why do we have speculators? - Give the market liquidity - Allows speculators to make profits on small price movements What is the Futures Market? Commodity Exchanges is the universal location created for the purpose of exchanging and determining the price of goods, such as: Food products: Corn, Wheat, Soybeans, Cattle, and Pork Energy products: Crude Oil, Heating Oil, and Natural Gas Financials Assets: Dow Jones, S&P 500, Canadian & US Dollar, Gold, and Silver Non-durable items: Cocoa, Coffee, Lumber, and Sugar Standardized Futures Grade - Specific quality and grade Delivery - Where and when Margin - Keeps everybody honest Watch the Intro to Indicators Video in the Zig Zag section of Disc #1 107

112 Fibonacci, Elliott Wave, & Zig Zag What is the COT? Federally Controlled Report of Trading Activity - Provided once a week (Fridays) Commercial Hedgers Large Speculators (Banks & Hedge Funds) Small Speculators (You and Me) COT Tab in Track n Trade Pro COT Settings in Track n Trade Pro 108

113 Zig Zag COT Indicator in Track n Trade Pro In the screenshot above you will notice that the COT Indicator has three types of bars: Blue - Large Professional Traders These are the pros, the big boys, the professional money managers, and bank fund managers. You always want to be doing what these guys are doing. Red - Commercial Traders These are the farmers and factories. They already own the product, so unless you are a farmer trying to sell your crop, don t follow the red guys example. Green - Small Speculators These are the tiny guys, the small speculators. Never follow their example; most the time they are wrong and losing money. Notice in the example above, they are all selling and going short during a huge uptrend in the market. They are doing just the opposite of what they should be doing, and just the opposite of the big blue guys. JBCOT Buy/Sell Indicator This is strictly an indicator that looks at what the largest industry players are doing and then simply points out their actions. The JBCOT (Jake Bernstein proprietary buy/sell indicator) does not even take the market s price into account. 109

114 Fibonacci, Elliott Wave, & Zig Zag The following screenshots are charts with trade examples using the JBCOT indicator. 110

115 Zig Zag 111

116 Fibonacci, Elliott Wave, & Zig Zag Analyze the Market for a Seasonal Bias Using Track n Trade Pro s Seasonals Plug-in, you can determine if a market s historical trending pattern is in line with your current line of thought for the overall market direction. This gives us insight as to whether a market is performing in a Normal fashion or not. Trading Methodologies Speculators have two dominating thoughts of trading methodology: - Technical trading and Charting - Fundamental and Seasonal trading Traders often exhibit religious fervor over their desired trading methodology. 112

117 Zig Zag Seasonal Indicator Setting in Track n Trade Pro 113

118 Fibonacci, Elliott Wave, & Zig Zag Visit: to Download Disc Two Zig Zag Indicator Introduction Insert Disc #2 to follow along with the video training for this chapter. The Zig Zag is an overlay indicator constructed of a series of trend lines connecting significant trend changing tops and bottoms based on a minimum price change parameter specified by the user. How it Works Each Zig or Zag is confirmed only once the price of the market moves sufficiently to form a new Zig or Zag line, filtering out the less significant price changes. A Zig Zag indicator set to 10% change would produce a line that would only reverse after a change of 10% or greater was experienced; all movement less than 10% would be filtered out and ignored. Zig Zag, What s its Weakness? It is very important to remember that the last leg of the Zig Zag indicator continually changes based on the price action of the underlying asset. Therefore, this indicator works its magic using 20/20 hindsight. One must be cautious and wait for the Zig Zag indicator to confirm the reversal point without relying on its forward looking signals. 114

119 Zig Zag Zig Zag, 5% Change Zig Zag, 2% Change 115

120 Fibonacci, Elliott Wave, & Zig Zag Zig Zag,.25% Change Zig Zag, What s it for? The Zig Zag indicator is best used to help technical chartists analyze markets for recurring price patterns, such as Elliott Waves, Channels, Triangles, and Wedges, as well as topping and bottoming formations like 123 Tops and Bottoms or Head & Shoulder patterns. Watch Video Zig Zag with Elliott Wave Zig Zag, Elliott Wave Pattern 116

121 Zig Zag Zig Zag, Head & Shoulders Zig Zag Triangle Formation 117

122 Fibonacci, Elliott Wave, & Zig Zag Zig Zag Strengths One of the greatest strengths of the Zig Zag tool is its ability to calculate projection levels as well as retracement levels, which lends itself very strongly to being used by Fibonacci experts. Watch Video Zig Zag and Fibonacci Zig Zag Projections / Retracements 118

123 Zig Zag Alternate Retracements Alternate Retracements form lines of retracement and projections on relevant high and low points further back in the historical data set. Zig, Zag Alternate Retracements Zig Zag, Fibonacci Levels Using the Zig Zag tool in combination with Fibonacci s ABCD Projection ruler: Use Zig Zag to place our A point, our B point, and our C point, which gives us a D point target area in which we can expect this market to make its projected price level. 119

124 Fibonacci, Elliott Wave, & Zig Zag Price & Time Target Zig Zag Projection Tool Zig Zag has perfect 20/20 hindsight, but what if we could project off of Zig Zag s perfect 20/20 vision forward into the future? Track n Trade s 123 projection tool was created with this purpose in mind; we call it our Newton Projection Tool. 120

125 Zig Zag 121

126 Fibonacci, Elliott Wave, & Zig Zag Okay, let s put it all together! Watch the final video entitled Trade Example which combines Elliott Wave, Fibonacci, and the Zig Zag Indicator. Happy trading! 122

127 Risk Disclosure DISCLOSURE OF RISK: THE RISK OF LOSS IN TRADING STOCKS, FUTURES, FOREX AND OPTIONS CAN BE SUBSTANTIAL; THEREFORE, ONLY GENUINE RISK FUNDS SHOULD BE USED if/when participating in trading and investing. STOCKS, FUTURES, FOREX AND OPTIONS MAY NOT BE SUITABLE INVESTMENTS FOR ALL INDIVIDUALS, AND INDIVIDUALS SHOULD CAREFULLY CONSIDER THEIR FINANCIAL CONDITION IN DECIDING WHETHER TO TRADE. HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL, OR IS LIKELY TO, ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN HISTORICALLY, IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM, IN SPITE OF TRADING LOSSES, ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS, IN GENERAL, OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS. As stated above: WE ARE NOT RECOMMENDING TO BUY, SELL OR INVEST IN ANY SPECIFIC STOCK, FUTURES, FOREX OR OPTION. THIS PUBLICATION WAS DESIGNED FOR EDUCATIONAL AND RESEARCH PURPOSES ONLY. TESTIMONIAL DISCLAIMER: Unique experiences and past performances are not necessarily indicative of future results! Testimonials are non-representative of all clients. Trading Stocks, Futures, Forex, or Options involves substantial risk and there is always the potential for loss. Your trading results may vary. PitNews Press does not pay for testimonials, most of our testimonials are unsolicited and voluntary. The views and opinions expressed on any program are those of the producers and/or the persons appearing on the program and do not necessarily reflect the views and opinions of PitNews Press. VIEWER DISCRETION ADVISED: The educational videos affiliated with this publication are the sole responsibility of the authors and in no way reflect the views and/or opinions of PitNews Press or their partners. MATERIALS CONNECTION DISCLOSURE: You should always assume that the owner of this publication has an affiliate relationship and/or another material connection to the providers of goods and services mentioned on this, and/or any of our affiliated or linked sites, and more than likely, we are being compensated when you purchase from such providers.