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Trading strategy

The strategy of Fibonacci expansion analysis, then, is to locate points A, B and C on a price chart, determine the values of each point and enter the values into the objective point equations, producing three different profit objectives at varying distances from point C.

Once you have located the three profit objectives, your strategy for taking profits can include any

combination of the objective points. You might choose to take all of your profits at one objective point, for example, or if you are holding a multiple-contract position, you could peel off contracts at each objective point. As you work with the concept you will likely develop other workable strategies.

An important rule...is to use objective points primarily for exiting established positions.

Three targets, or logical profit objectives, can be calculated from any ABC market swing, whether the thrust is up or down, using intraday highs and lows.

A software program I designed called Fibnodes can perform these calculations and a variety of others in a particularly effective format, but all you must have is a pencil to do the figuring or perhaps a programmable calculator.

Profit objectives also can be located on a price chart with an architectural tool called a proportional divider or precision ratio compass. The resulting numbers are extended from point C in the same direction as wave AB.

In Fibonacci expansion analysis, negative numbers are not recognized. It should be noted also that analysis does not use time to locate profit objectives. Figure 2 illustrates the potential for reaching price objectives at different times.

It is possible for a wave that occurs after wave ABC to reach all three objective points after experiencing a reaction at the previous profit objective. It is also possible that the first objective could be the end of the move.

Note that, when using logical profit objectives, significant selling will be manifest at all three objective points in an up move, while buying will occur in a down move. You cannot be sure of the extent of the resulting reaction, only that the activity will occur. There's nothing wrong with exiting partial positions at each objective as it is met.

An important rule to observe when using expansion analysis, however, is to use objective points

primarily for exiting established positions. That way, you are always trading with the trend of wave AB and not against it. (A strategy of purchasing options against objective points is also acceptable, but more risky than flowing with the trend). After exiting a position, I usually wait for outright entry signals before taking new positions.

Whether you use COP, OP or XOP as a profit objective, it is a judgment call that takes into consideration other tools in your technical arsenal—for example, overbought/oversold oscillators, strength and thrust of the move indicators, previous length of base, trend in the next higher time frame and volatility.