Make Money With the Fibonacci ABC Pattern

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Make Money With the Fibonacci ABC Pattern
Understand that most problems are a good sign. Problems indicate that progress is being made, wheels are turning, you are moving toward your goals. Beware when you have no problems. Then you’ve really got a problem … Problems are like landmarks of progress. —Scott Alexander

Fibonacci levels are well-known among traders. Many traders have attempted to employ Fibonacci levels, however, like many technical indicators that perform well in principle, they provide a hurdle when it comes to making money with them.

There are two issues with manually constructing Fibonacci levels. The first is constructed by drawing a succession of Fibonacci lines at each important turn or pivot point: After a stock has zigzagged a few times, the ensuing pivot points produce a cacophony of levels that may make a chart incomprehensible.

The second demonstrates that intraday traders often employ more than one time frame in making trading choices, such as a one-minute, three-minute, five-minute, 10-minute, and 30-minute chart. End-of-day traders may also make advantage of 60- and 90-minute time periods, as well as daily and weekly data. By the time either of these traders has drawn Fibonacci levels for each pivot point in each time frame, they are often in a state of chaos.

The Nexgen Solution

John Novak set a personal objective of solving this challenge and determining how useful Fib levels may be in trading. It was a significant hurdle that he and his Nexgen Software Systems business partner (and wife) Melinda tried to tackle. They completed the answer after more than six years and many software versions. The T-3 Fibs Accumulator was the application that automatically found and drew key Fibonacci levels utilizing 40 distinct time frames and critical pivot points from each (see Figure 1).On intraday charts, these confluence levels enabled traders to determine where a stock, future, commodity, or currency was most likely to pause or reverse. produced the chart. Nexgen Software Systems gave the signal.

Figure 1: Intraday chart of the S&P 500 e-minis (ES) displaying computer-generated T-3 Fibs Protrader confluence levels. The bigger the number of lines on the chart, the greater the significance of the level.

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The Novaks started to detect a consistent price configuration after spending literally thousands of hours studying market movements, particularly near confluence levels. The ABC pattern, as defined by John, is “a halt run of the initial retreat following an aggressive rise to the upside that indicates additional potential in the direction of the greater increase.” produced the chart. Nexgen Software Systems gave the signal.

Figure 2 shows an ABC pattern. A lengthy pivot signal. Confluence zones are not shown.

For example, at the start of an uptrend, the stock would make an aggressive advance to an extreme pivot point (labeled “Ext” in Figure 2) outside its trend channel. This sort of behavior was often a hint that a new short-term trend was forming. After placing an extreme pivot point outside the trend bands, the price would reverse somewhat and place a pivot designated “A.” Frequently, the market would then restart its initial rise in order to place another extreme pivot outside the bands. Before the rise continued, the equity would retrace to insert another A. Although Novak created his own trend bands, Keltner Channel bands also function nicely.

When pivot A fell on or near a Fibonacci confluence indicated by their T-3 Fibs Protrader indicator, it was a decent time to enter a cautious long trade with the trend (see Figure 2).It was additional confirmation if the A happened at a midtrend bandsupport level (magenta line). The position would be closed if another extreme pivot developed outside the trend bands, another pivot formed inside the bands, or the price fell through support, triggering the stop loss placed right below the midtrend band or sustaining confluence level.

As long as the trend lasted, each time an A and/or C developed, a cautious long trade would be made, particularly if they happened at or near a Fib confluence level. The trade would be exited at the next pivot or confluence level, and the trader would wait for the next extreme pivot to emerge before starting a new ABC series. In an upswing, stop losses would be placed on pivots A and C, 1% to 5% below the support confluence level (depending on the equity being traded and trading plan of each specific trader).(See also: Ten Steps to Creating a Profitable Trading Strategy.)

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If you want a full demonstration, go to the Nexgen website and view the free ABC instructional films.

Image by Sabrina Jiang © Investopedia2020

Figure 3: Another combination of A, B, and C, as well as an ABC failure when the stock fails to place a higher high pivot to confirm the uptrend.

The ABC pattern may be combined and permuted in several ways. Figure 3 depicts another arrangement. In this situation, the equity placed an extreme followed by an A, allowing for a prudent long trade (first green arrow). The long would be evacuated at B and then re-entered at C. (second green arrow).In this case, the pattern failed since the equity failed to achieve a greater high than B. When an ABC failure occurs, the deal is instantly exited.

More aggressive traders may conduct counter-trend transactions based on their expertise and trading account size. A short from the B pivot (red arrow) at a Fib confluence level in the above example would be deemed counter-trend and hence more risk.

It is pretty simple to spot a trade pattern, but the difficulty comes in attempting to totally automate the process. Nexgen took up the challenge. ABCs and extremes had to be programmed, but a trend confirmation signal had to be included as well. As a result, there was less danger of a trader mistakenly joining a counter-trend and hence a riskier move. When a new uptrend was established, a green vertical bar appeared under the price bar, while a magenta bar emerged above the price bar when a downtrend was confirmed. Trend and counter-trend transactions were identified on the chart to make the signal more evident (see Figure 4). supplied the chart, while Nexgen Software Systems gave the alerts.

Figure 4: A chart displaying Nexgen signals, confluence lines, MACD, cycles, and significant trend indicators.

“One of the things that most traders don’t realize is that you will have an opportunity to trade not only the entire ABC pattern, but a vast majority of the time you will be as profitable or more profitable when you trade all of the combinations of the A pivot, the B pivot, and the C pivot with the overall trend,” says Novak.

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Figure 4: No. 1 depicts the prior ABC pattern failure. Those that entered the counter-trend C short to the right at this moment would exit the trade at No. 1. Near the confluence, additional extreme forms and an A-long possible trade signal were formed (No. 2). (horizontal white line).This trade would be exited at the third B pivot point. Aggressive traders who executed this counter-trend trade and were not stopped out or exited would have had a highly successful trade to the following extreme point, which began the next ABC sequence. The following counter-trend C trade would have been quite rewarding as well (No. 4).

Novak is not the first to notice that trading an ABC pattern might be beneficial. This sort of trading approach has been described in the literature by others. Novak is a genuine trading pioneer since he has combined this pattern with trend channels and automated Fibonacci confluence zones to make them significantly more dependable and hence lower-risk trade signals.

Computerized KISS

Trading does not have to be difficult. In reality, the finest traders have all learned how to KISS—keep it simple and straightforward—before they can really excel in the trading game.

But who says traders can’t employ successful (though convoluted) algorithms if their computers handle the majority of the heavy work behind the scenes? Even though dozens or even hundreds of thousands of computations occur with each new price movement, signals are as simple as ABC for the trader who has the necessary tools and knowledge.

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