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When Does a Trend Become „Real“?

Breakouts and Fib Numbers
Many years ago a Fibonacci guru I know was adamant in explaining to me that it was impossible to combine breakout trading with Fibonacci ratios.
However, any “breakout” simply involves a violation of some price level, doesn’t it? A breakout violates a high, a low, support, or resistance, or even an
area of Fibonacci confluence. I am not a great fan of trading Fibonacci ratios, but I am also not a breakout trader. If I had to put a name to what I do, I would
call it “momentum” trading. I believe the money is made from properly managing momentum. Nevertheless, there are ways to combine breakout trading
with Fibonacci ratios. Just bear in mind that the big bad sharks will be looking for you when you trade with fib numbers. This in part is because you will
find yourself a fish among many when the sharks become hungry for stops.
o What You Need to Know

Anyone who trades, soon finds himself asking the question
„How do I know if support or resistance is really broken?”.
Put another way, if you are looking at a trend line or a fib
number for support or resistance, how do you know when
prices break through that the breakout is real? After all, was
not support or resistance supposed to hold prices? Were
not prices supposed to bounce off of Fibonacci support or
resistance, giving you an opportunity to trade in the opposite
direction? There is indeed a way to know that support or
resistances has not held, and that prices are continuing in
the direction they were moving!
Is the method 100% accurate? Is anything for certain in
the marketplace? I think not, but there is a very old concept

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July 2010 | www.tradersonline-mag.com

that I was taught and it remains among the best I have seen.
I can show you a number of ways to use what I will describe
next, but one way will do for now. Simply stated it is this:
Whenever you have a breakout, you cannot consider it real
until you have confirmation of the breakout.
Whether it is the violation of the number 2 point of a
1-2-3 high or low formation, the violation of a trend line, or
the violation of Fibonacci support/resistance, you must see
confirmation before taking the risk of a trade entry. If you are
using a 1-2-3 low or high, you must see an entire bar move
beyond the number 2 point. If you are using a trend line, you
need to see an entire bar move beyond the trend line, and if
you are using a fib confluence, which is supposed to support
or resist, you have to see an entire price bar move beyond

3666. then you probably have a confirmed breakout (violation). what youare probably seeing is nothing more than stop running.TRADERS´STRATEGIES the area of confluence. (Figure 1) The formula is simple: July 2010 | www.com of the trend which can be very useful for swing and position traders. If these requirements are met. every part of the breakout bar must be in the clear. or support or resistance. By entire bar. Also depending on your time frame it may take a while to happen.com 27 . a trend line. What we see is a Fibonacci expansion from 1. or a trend line. we will be looking at a daily breakout.. having passed the price level of a number 2 point. so patience for the full breakout and confirmation of the breakout will help you preserve capital. which will signify the potential continuation The daily euro chart shows a simple Fibonacci expansion to an area of support. F1) Simple Fibonacci Expansion Confirmation Is Necessary Now. This is especially important in keeping you from trading a false breakout. Of course. Otherwise.e. will the support hold? Source www. the larger the time frame from which the breakout occurs. what about confirmation? So far all we have defined is the breakout bar itself. Euro Example In the case of the euro chart that follows. this same concept can be useful for intraday trading as well.genesisft. The question is. As with all violations. the more powerful it usually is but the longer you have to wait.4585 down to 1. Confirmation is seen in that you must have a Close that moves beyond the high of the breakout bar if prices are moving up and a Close beyond the low of the breakout bar if prices are moving down. when using the lines of support or resistance. i.tradersonline-mag. I mean everything from high to low of the breakout bar.