Trading with Trend Lines and Fibonacci

by Bob

Several great posts regarding trendlines here. I succeed most often when I combine trend line analysis with the standard fibonacci retracement and extension levels. My typical prep is scrolling through EOD charts of stocks that meet certain price, vol, mkt cap, industry characteristics, and have hit either 52 week highs, or 3 month highs over the last 10-20 days with a scan I use in TC2000 from Worden.

I apply a Fibochart fibonacci overlay grid, which allows quick eyeball assessment of my watchlists with regard to fib retracement and extension levels. I then apply trendlines to stocks approaching the 61.8% fib level. When I find stocks where the fibonacci levels and the trendlines come close to converging, I add to my buy list for a little more scrutiny. Should the stock begin to head higher and I take a position, it must have a 3:1 win/loss ratio and I will place stops below the lower of either the trendline or fib line and I never risk more than 1% of my account on a trade, so I position size accordingly. See Elder's Trading for a Living or TradeMike's site where he gets into position sizing and tracking your R value. I look to take profits as the stock retraces the last down move by 50-100% if the 3:1 condition is met. Trader discretion at that point.

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