GENERAL DISCUSSION:

Various Fibonacci-related trading strategies have been discussed throughout this book. Some have catchy names designed to help you remember their character, some don't. What qualifies as a trading tactic and what might be considered a trading hint is a debate I won't get into. Regardless of what these strategies are called, I believe it's particularly helpful for you to have a chapter devoted specifically to this topic, and to have certain of these approaches defined, apart from market examples. Those of you who have studied my earlier material may recognize that fewer tactics have been described in this chapter than you have seen before. The reason is simple. Although all of the tactics described earlier are effective and continue to work, I believe that not all of them deserve equal consideration.

Now, before we address the specific techniques described, let's be sure we understand the problems they are designed to solve.

Consider the following Fibonacci support series depicted in the FibNodes program printout.

Focus Number File SMNDA4 Focus* (High for the swing)

Point Number Support Fib Nodes Point* (Enter highest reaction low first)

This series clearly shows a Confluence area between 17214 and 17204. We will assume some appropriate context that indicates a choice of that Confluence area as our long entry point. We'll choose 17220 as our specific entry price and call that point 'X.' The assumed context could be something previously discussed in this book or something you have chosen as an appropriate indicator. For example, maybe you want to look at put-call ratios, Bellinger Band extremes (on the pullback), a respected recommendation, a Commitment of Traders report, or whatever. A deeper D-Level, let's say just below the 17080 level, will be the protective stop placement area 'Z.'

Problem: How can we best enter this market at 'X,' where we assume support will manifest?

Answer: Different strokes for different folks, hence there is more than one Fibonacci entry tactic.

NOTE:

Be sure you understand how I have framed the forthcoming discussion, before you go on. The next series of important examples all hinge on the preceding paragraph.

BONSAI: AN ENTRY AND STOP PLACEMENT TECHNIQUE

Although I rarely use this particular tactic, I include it for those of you who are psychologically suited to it. This would include traders who are willing to accept a lower percentage of winning trades than would be possible using other techniques described in this book. A number of former floor traders I have trained like this technique. Hyper Hank would likely be a Bonsai enthusiast. Those who utilize Bonsai believe, perhaps correctly, that their ultimate level of profitability will be enhanced by this entry tactic, since they typically trade more often and keep the level of each loss suffered very low.

Here's how this very simple strategy works.

You enter both orders at the same time and hope the stop isn't hit. If it is, and the price immediately gets back above 'X,' you then reenter the trade at the market and again place

your stop at 'Y.'

If the original stop at 'Y' is hit and the price remains below 'X,' then see if the context you choose to support the trade is still valid. If it is, you select a deeper DiNapoli Level upon which to enter the trade and place another money stop below it.

Bonsai players have 'Y' defined differently for each different Time frame they may choose to play. The amount is usually determined by individual experience in a given market. Between 55 to 85 points is very typical for the five minute S&P, while three to five thirty- seconds (3-5/32nds) is common for the five minute US Bond market. The advantage of using Bonsai is its simplicity. Its ease of use frees the mind from more complex stop loss exit strategies and therefore may preserve a more relaxed attitude in the trader. He is therefore free to properly pursue the next trade in this, or other markets.

There are many disadvantages. Bonsai players typically disregard volatility from one day to the next in their selection of pre-set money (or point) stops. If they don't have excellent brokerage services, the frequency of trading can be costly in both slippage and transaction fees. They also must have quick floor access to reenter orders if they are trading short term. Although the exit criteria is simple, trades require constant observation, since contingency order criteria left with a typical broker would likely be too complicated and subjective for the broker to be held responsible for the result.

BUSHES: AN ENTRY AND STOP PLACEMEN TTECHNIQUE

Bushes is the technique typically used in the examples in this book with the exception of those described in "Advanced Comments.". You enter your buy above one D-Level and hide your stop behind another. It gained its name from a market professional who attended a private seminar some years back. He crouched behind a large plant I had in my office area. Then, as he shot at another attendee with his finger, he indicated that his favored method to capture profit was to hide behind the bushes, jump up, take a shot, and duck back down behind the bushes. The entry and stop strategies described in CHAPTER 11 (AN IDEALIZED TRADING EXAMPLE) are clear examples of Bushes. Standing up and taking the shot is akin to your entry before one D-Level, while crouching down behind the bush is akin to hiding your stop behind another D-Level. The differing trade entry strategies described in CHAPTER 11 are simply variations in where to take the shot and which bush to hide behind.

The obvious significant difference between Bonsai and Bushes is the lack of "cover" for* the stop. The subtle, significant difference requires a knowledge of floor mechanics. Suffice it to say, if your stop is just behind a support D-Level, you have a good broker, and you're hit, slippage should be mitigated. If you have no support (more likely with Bonsai) even with a good broker, who knows where your stop will be filled. Your chance of having a better fill is alwavs higher with Bushes than with Bonsai because of the support manifested by the D-Level itself, even if it doesn't hold.

MINESWEEPER A: AN ENTRY AND STOP PLACEMENT TECHNIQUE

Using this technique, we're exercising more caution than with either Bonsai or Bushes. Here's how it works. Let's say we want to enter the market at D- Level 'X.'

While we expect support at 'X,' we wait, first for support to manifest at Point 1, then for a move up to 'F.' Point 1 and Point F (our Focus Number) are selected by market forces. We do not attempt to precalculate them. After those occurrences, we calculate- the Fib levels of that up move. On a line chart, it would look like Chart 13-4.

Fibonacci Tactics 223

Our actual entry would be above the .382 Node. Our stop would go under the .618 Node or against the old low at 1. We've bought insurance which may of may not be costly depending on what market action actually develops around the selected D-Level entry 'X.' With the benefit of hindsight, we can explore a variety of possibilities.

If we had support very near 'X,' our stop at 'Z' wouldn't have been hit and our actual entry "would have been higher than an entry at 'X.' Our insurance policy in this case would be costly as represented by the distance between the arrows on Chart 13-5. Don't misinterpret this. The cost is between our original D-Level choice 'X' and our actual entry, not between our actual entry and our stop. Of course, we might not get the fill in the form of an expected retracement back to our actual entry, but it's likely we will.

Let's assume the expected support area at 'X' was deeply penetrated, all the way through 'Z,' to a deeper Node or Confluence area 'K.' 'Y' in Chart 13-6 represents a Bonsai money stop. It's included here, as well as the Bushes stop, so the Bonsai players among you can see the effects of possibility 2. In this scenario, we would have been stopped out if utilizing the Bonsai or Bushes entry tactic. Waiting for the Minesweeper entry prevented getting stopped out. Additional advantage was achieved since we entered at a lower price than the original D-Level location at 'X.' So we achieved some significant benefits utilizing this tactic under these conditions.