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TRADERS´STRATEGIES

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.

Only then will the breakout be real. A trader needs an arsenal of tools. But there comes a point at which prices are seen to be clearly trending. and options. At each retracement. In Figure 2. and futures. The high and low are defi ned by the dotted lines. There was a breakout. the word “probably” had a great deal of meaning in this case. This is a true sign of consolidation. The most important thing is to wait for a confi rmation of the breakout. and educator is one of the most eclectic traders in the business. author. His over five decades in the markets include position trading of shares. However. Source: www. Conclusion Techniques that are used for breakouts are not the same techniques you use for trading once prices are trending. prices formed an area of consolidation. The question is “At which point can we identify a trend?”. Abandoning One Method for Another Figure 3 demonstrates the beginning of a trend using a Ross Hook as a filter. you should not assume that selling short would probably result in a continuation of the former trend. And every failure to make a new low (in this case) becomes a subsequent Ross Hook (RH). we would expect a violation of the low of the 1.com Joe Ross Joe Ross. What we have been looking at is how to know if a violation of a key price level is real. and forex. Following a brief correction. Without an actual confi rmation bar in place (a Close lower than the low of the breakout bar).3754-1. With the exception of a single bar.TRADERS´STRATEGIES F2) False Breakouts B-A+C = Fib Expansion area: (1. Ross day trades stock indices. there comes a point at which a trader must abandon the method in favor of the reality of what is happening to prices. every bar that follows the 1. and continuation of the trend. Following the fi rst Ross Hook we see on the chart (Figure 3). The bar following the breakout bar did not Close lower than the low of the breakout bar.4223-1. Let’s look at that now.genesisft.3666 bar does not defi ne the high and low of the consolidation. and has written books about it all– twelve to be exact. He trades futures spreads and options on stocks. The so-called Ross Hook™ can help us here: A Ross Hook is in place when prices fail to make a new (high) low following the breakout of any form of consolidation. a range of support was there.genesisft.tradersonline-mag. Note: The range of the 1. A method for entering the market ahead of a violation of a Ross Hook is called The Traders Trick Entry™.com As with all methods. establishes a trend. For this. a new Ross Hook was formed. currencies. it never materialized. Source: www. A violation of the point of a Ross Hook. and indeed. We have been looking at support and resistance levels. Instead. he produces a trading newsletter called Chart Scan™.3666 bar (29 in all) has some part of itself within the price range of the 1.3666 bar. The Traders Trick Entry is one way to implement the Law of Charts formation known as The Ross Hook. but the bar following the breakout failed to Close lower than the low of the breakout bar. The breakout method discussed in this article deals with breakouts from areas of support and resistance. A Ross Hook is one of the formations of the Law of Charts™.5148) + 1. Ross has written countless articles for many trade journals and magazines and has appeared on TV financial programs. futures.4585 = 1. 28 July 2010 | www.com F3) Ross Hook We can expect support at that level. the confi rmation method truly worked. But as we can see from Figure 1. We see the same situation again on the last two bars.3592). Prices dropped down to form another area of consolidation.3666 In Figure 2 we see two false breakouts being identified by a failure of prices to follow through with lower Closes following the breakout bar. prices began to trend.3666 bar (1. n . trader. Moreover. I combined breakout trading with Fibonacci ratios. as well as financial programs on Radio.