It's that time of year when I usually put down an article or two on the topic of rock-solid trading systems. By this I mean those systems that have a high win ratio, and are particularly difficult to mess up. These two criteria, of course, make such systems particularly suitable for beginner traders. Most rock solid systems are based in one form or another upon the concepts of support and resistance, and today's subject, trading with fibonacci levels, is no different.

Usually talked about in the same breath as 'Elliot Waves', fibonacci lines (or 'fibbos' as the floor traders call them!) are actually much older, and are nothing more than the expression of a peculiar mathematical phenomenon that is visible all over the planet, in almost every area of existence. Discovered in the twelfth century by Leonardo da Pisa, a crazy Italian, Fibonacci retracement levels are basically a number sequence that influence many natural phenomena, and also seem to be particularly applicable in trading.

Fibonacci retracement levels are the real-world version of these numbers, and when applied to stock trading charts can give the trader a huge advantage, highlighting likely points where the market may pause or reverse entirely. The basic trick is to realize that after any major price move up or down, the market usually turns, at least temporarily, as profit taking occurs. This means that prices will usually retrace a large portion of the previous move, and guess what? Support and resistance tends to happen at levels predicted by the Fibonacci levels! So what are these magic levels, and how do you

calculate them? Read on!

Take the distance of the original move (i.e. the distance between the low and the high or vice versa), and subtract (or add!) from it the following percentages:- 23.6%, 38.2%, 50% and 61.8%. In other words, if price just ran up 100 points on XYZ stock from 100 to 200, expect pullbacks to hit support at the Fibonacci retracement levels of 176.4, 161.8, 150 and 138.2.

You've probably already spotted the problem - how do you determine where the original move started, and where it ended? In this respect the subjectivity of Fibonacci levels is akin to the wave-counting problem suffered by Elliot Waves (was it wave 3? or 4? Or is that actually a super wave??? :-). Never fear, there is a solution, and a frighteningly simple one. You need to get consistency in order to apply the fibonacci levels, and how do you get consistency? That's right - automate it. Rather than write your own fibbo software, I suggest you head on over to www.fibonnaci.com where all you have to do is input the symbol you are interested in, and press a button. It then gives you the latest fibonacci numbers for trading that stock plus a few bits and pieces. And best of all, it's free. Seriously. As a Trader's Initiative site, www.fibonnaci.com is run by traders for traders, so no charges are made for the service.

Why do fibonacci levels works so well? Because they are based on support and resistance, and as you should already know, support and resistance are the bedrock of any successful trading

system. Quite frankly, most traders looking at a chart will see pretty much the same thing - if it looks overbought, it will seem to 'want' to revert to a lower level - not too far and not too close. The fibonacci levels are a rule of thumb formula for expressing this 'goldilocks' effect. Can you use it on anything? Pretty much. www.fibonnaci.com has easy links for all the stocks of the S&P 500, as well as other stocks (such as the UK's 'FTSE 100'). There are many traders using it on forex, commodities and options too - the phenomena discovered by a crazy italian monk almost a thousand years ago really is that good!

The www.fibonnaci.com free version use retracements on price. There are also versions that use retracements in time, and the charmingly named 'fans' and 'arcs'. How you decide to trade fibonacci levels is entirely up to you - just remember to be consistent - don't jump from time retracements to arcs then fans and expect to make any money!

That's all from me for now - Have a good holiday season, and see you all next year for a trade-tastic successful year!



About the author:

Jack writes for the Traders Initiative, a co-operative of traders doing nice things for traders, including building free websites so that newbies don't have to spend thousands of dollars before they even begin to trade. The latest site from the Initiative is www.fibonnaci.com, a site offering free fibonacci levels for any stock symbol you care to type in.

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