Here is one of the more detailed and specific trader questions I’ve gotten in a while.
Here’s a question I’ve been trying to find an answer to for a while now…
I am a short term futures trader using primarily support and resistance levels to trade breakouts using stops and targets based on
1.5 to 2 times the 19 period average of ATR. I trade using three time
frames: a 125 min chart, a 25 min chart and a 5 min chart. Once I’ve identified the overall trend and a possible trade, I use a 15 min Point and Figure chart to filter out the strongest support and resistance areas (the box sizes obviously vary depending on the contract, e.g. 2×3 for the ES, or .0010×3 for the currency contracts,
I have had some success using Fibonacci Retracement Lines to help filter out more effective levels. What I am having trouble discerning is where the Fibonacci Lines “should” start and end. Should they be on the 125 min chart, the 25 min chart or the 5 min chart? If they’re on the 5 min chart should they be from the high to low of the previous day, previous 2 days or previous 5 days?
Any help with this questions would be greatly appreciated.
Thank you for a great blog, I always look forward to your posts.
It’s very interesting to hear someone talking about definitely non-standard charting timeframes. Not too many folks go with 125 and 25 minute bars. The 19 periods used for the Average True Range (ATR) is also a non-standard one (14 days is the common default). I’m all for looking at things in non-standard ways. That allows a trader to more closely match an indicator to the timeframe the trader is operating in, not just the one the indicator’s developer used. Obviously, though, considerable testing is required to get to the right settings and to understand the ins and outs of the indicator with the new setting.
In terms of the Fibonacci retracements, I’m not a major user in my own trading. They are something which occassionally get worked in to my analytic writing, however, so I’m not unfamiliar with them or their application.
The response I would offer regards to the questions asked are firstly to use the chart timeframe which best applies to the timeframe of the timeframe of the trade in question. For example, if you’re trades are based on the 5 minute chart then that’s the timeframe of chart the Fibos should be drawn on. Using ones from a longer-term chart may provide an interest reference point, but generally have less immediate relevence for the shorter-term timeframe.
As for where to draw them, Fibo lines are generally derived fromÂ meaningful high and low points. That doesn’t mean a specific bar. It means the latest high and low which bracket the last significant directional move in the timeframe being reviewed. For example, if you’re looking at the daily S&P 500 chart, then the first level Fibonacci retracement lines you draw should probably be based on the August high and hte October low.
But I’m not a Fibo expert, so others may say something different.
The last comment I would leave Dom with is that at least on the face of it his approach seems extremely complex – potentially more so than necessary. If I were working directly with him on his trading I would probably have him take a look at whether he could simplify things.