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CONTENTS
FOREWORD ACKNOWLEDGMENTS INTRODUCTION
xi xiii
1
CHAPTER
1
UNDERSTANDING
HOW FIBONACCI WORKS
11
SECTION I
CHAPTER
THE MOST IMPORTANT FIBONACCI TOOLS
HOW TO FIND IMPORTANT SUPPORT AND RESISTANCE LEVELS WITH FIBONACCI USING FIBZONES TO IDENTIFY HIGHPROBABILITY REVERSALS
15
2
3
17
CHAPTER
43
ix
x
Contents
SECTION II
CHAPTER
MY FAVORITE FIBONACCI STRATEGIES
How To Enter Trends Using The Trend Trigger Strategy
55
4 5 6 7
59 67
CHAPTER CHAPTER
THE REFLECTION REVERSAL METHOD TRADING PULLBACKS USING THE TRIPLE
CROWN STRATEGY CHAPTER TWOSTEP PATTERNS (TSP)
Capture Strong Trends With The Symmetrical TSP Enter Pullbacks Using The Gartley TSP Find Powerful Reversals With The Butterfly TSP
83 97
100 111 123
CHAPTERS CHAPTER CHAPTER
HEISENBERG 200
137 153 165
9
SHARK ATTACK
10 AIR POCKETS
SECTION III IT BOILS DOWN TO PROPER EXECUTION
CHAPTER CHAPTER
189
191
11
ENTRY PATTERNS: HOW TO ENTER THE TRADE MANAGEMENT: IDENTIFYING AND
12 RISK
MANAGING
BIBLIOGRAPHY ABOUT THE AUTHOR
THE KEY AREAS OF RISK CONTROL
211
219 221
f


~~
INTRODUCTION
When I first started trading 12 years ago, I was looking for the secret answer to trading. What was the one indicator,the one method, the one guru, that could tell me when to buy and sell? To find it, I spent thousands of hours and dollars on books on the subject of technical analysis. I had myself tutored directly and indirectly by some extremely successful traders who have been in the thick of this business for years. From my initial exposure to the market, to the present day, this 12year journey has been filled with reward, humility, excitement, disappointment, and hardknock education. Early on, my trading was very volatile and unpredictable. Much of that rollercoaster ride was due to the fact that I was making highly charged emotional trading decisions. I was floating from one trading system to another. I had no plan of attack. Fortunately, it was this frustrating experience that became the driving force behind my desire to create a wellthoughtout trading plan. I am excited to say that what I have learned with Fibonacci analysis over the years has become my "holy grail." With this methodology, I have a plan of attack before each market day's open and can execute every trade with confidence. Sure I have losses and draw downs like every trader. But I have the confidence that over a reasonable sample size, I will be profitable.
So, when I was approached about writing a book on the trading strategies I use with Fibonacci,I was, naturally, excited. It is my honor to share with you the fruits of my
labor.The information I'm about to share with you is extremely exciting to me.
1
For now.2 Introduction Not a trading day goes by that I am not applying Fibonacci analysis to the markets and. I'll take a couple of chapters later on to walk you through those details. Don't get caught up in the specifics or math of these charts. watching markets conform to my Fibonacci work. Now. for now. just observe some of the opportunities this analysis presents on a daily basis. . in turn. let's take a peek at a few examples of Fibonacci at work and the potential decisionmaking power that Fibonacci puts in the hands of a trader.
000 cTraders.. .~ 70.9ijS ~ll. this represents tremendous profit opportunity.000 65.fp\~bt 6Q. the Biotechnology HOLDRs (BBH) was in a solid twoyear downtrend and was trading down around $65. ~ ~1M ~ .60% 65. For example.ool) . we are able to project price zones where there is a high probability of a trend reversal occurring.550 _~_I&_t14+__ + . Fibonacci price support alerted us to one of these highpotential reversal zones between 60 and 65.~~A Fibonacci alerts us to a potential reversal.+ Introduction 3 .861 Ret 2.400..000 155TD 53. To the trader.618 1 :::S.com By properly applying Fibonacci to price charts of stocks and commodities. 75.~=+===gHbd~:.
future.4 Introduction Over the next couple of months.8Eol Ret 2. the BBH is up 420/0.18 Exp is i.800 App 1. . Fibonacci also alerts us to where price will likely reverse to the downside. the BBH traded up over 27 points or 42%. creating opportunity to profit by selling short a stock. 30 days later.S. Not bad for a market that had essentially been trending down for the last two years. or commodity.321 ____ 2~ E.4.000 t===========IjjI!lI~f@~ll~ Apr As the next example will show.E.s &2. 1E.
.272 28. L Fibonacci projects a 1potential downside reversal.00% 16.That's a 64% upside move.. 2002.000 27.376 Ret 0382 28.000 Exp 1.808 App 1. but this seemed like an aggressive target.J. ~ ~ 28. Not only were we looking for a reversal to the downside.000 .00 per share to a high on August 15. At the $26 level.613 .20. of 26.226 Ret 1.399 Ret 1. this stock had rallied from a low of $16.Over the course of five weeks. Fibonacci alerted us to the probability of a reversal to the downside. but Fibonacci ratios had calculated a final price objective down around $13.272 0.J__::".22. ~{c~\\ OTD + Objective > 13.I knew Fibonacci analysis was accurate.898 Ret 1.+ Introduction 5 Below is a chart of Myriad Genetics (MYGN).618 26.
382 Ret 28.G18 2&.. the accuracy of this analysis can be downright scary. Ret 1.000 1.37G 0. Iftttt 1ft ftl 1=1'13._ 28. Who would have imagined that a stock that was up 63% trading at $26 would be trading at half of that value in just a few short weeks? I guess Fibonacci did! _________  'c.399  26.272 2B.618 App 1..272 .808 App 1.22(.000 Exp Ret l.000 27. Not only did MYGN reverse and go down when Fibonacci told us it would..450 MYGN loses nearly 50% of its value in 5 weeks.6 Introduction As you can see below. but within a few short weeks it actually hit our profit objective.B98 Ret 1.
Introduction 7 I've shown you a couple of examples on daily charts. Most investors were heading for the exits.....618 49.............685 et1..&18  11t .....367 et1....943Ret1. I 1====::::1. ~8:i~~ His ~~! 49. Below we are looking at a 60minute chart of eBay (each bar represents 60 minutes of price activity)... It has been my experience and observation that the exact same analysis can be applied to almost any time frame as long as sufficient volume and data exists to create a measurable price bar........618 R 49.618 R 1 49...... This stock has sold off over 4 points in four days.832 pp A 1...... Fibonacci projects an opportunity to go long........ Fibonacci not only kept me in my seat but identified a key price support zone where there was a high probability that it would reverse...
It would take at least three years at your local bank (at 2003rates) to net those kind of returns in a savings account.943 Ret 1.224. They exist on weekly.85 Ret 1.18 1 + 24 Bars ·8. commodities.f.f.7 Ret 1.f.18 49. They occur in stocks.832 App 1. and intraday charts.3f.47f.f. daily. over six hours. and futures contracts. 1 4'9.18 49.18% 50. And this analysis can be used and applied by daytraders. and longterm traders alike.f.8 Introduction The very next day. e8ay trades up over 3 points the next day. . eBay traded up over 3 points. or 6%. swing traders.18 49. it Trading opportunities like this one and the previous examples exist every day with Fibonacci. ·4.
for the remainder of this book let me focus on teaching you how Fibonacci works and how you can apply it to your own trading. I will Chapter 5: The Reflection Reversal MethodNext. teach you one of my favorite Fibonacci trendfollowing strategies. I will show you how. I will explain what you need to understand about Fibonacci numbers in order to use them as a powerful tool in your trading. enter the initial pullbacks of newly formed trends and trade major reversalsin all time frames. But instead." These three patterns will enable you to capture strong trends. Chapter 7: TwoStep Patterns (TSP)In this chapter I will teach you three variations on what I call "TwoStep Patterns. Section I: The Most Important Fibonacci Tools Chapter 2: How To Find Important Support And Resistance Levels With FibonacciNext I will lay the foundation for the rest of the book by teaching you the basic stepbystep process that is common to all of the strategies that I will be teaching. FibZones will provide you with a way of using multiple Fibonacci relationships to find reversals that have a higherthannormal probability of occurring. I will teach you how to determine when a violation of the widely watched 200day moving average is likely a fakeout. Section II: My Favorite Fibonacci Strategies Chapter 4: How To Enter Trends Using The Trend Trigger StrategyHere. I will teach you how to use Fibonacci in order to enter the powerful reversals that occur fromthese fakeout moves. Chapter 6: Trading Pullbacks Using The Triple Crown StrategyThis is my favorite pullback strategy. Chapter 8: Heisenberg 200In this strategy. . you will learn how repeating patterns in price can playa key role in helping you to identify the most powerful reversals. Chapter 3: Using FibZones To Identify HighProbability ReversalsYou will then learn about FibZones. Here is what you will learn as we work together chapterbychapter: Chapter 1: Understanding How Fibonacci WorksIn this chapter. through the use of certain Fibonacci ratios and certain swing patterns. you can find excellent pullback trades at the beginning of a reversal or within a strong trend.Introduction 9 I could go on with many more examples to show you how Fibonacci can help you identify trading opportunities in both stocks and futures and for different time frames.
10
Introduction
Chapter 9: Shark AttackThe next strategy I'll teach you is a special variation on doubletop and doublebottom patterns. By using Fibonacci Extensions, you will be able to identify major reversals that occur off the second bottom (or top) of this pattern. Chapter 10: Air PocketsIn this strategy, I will show you how to trade momentum moves that occur when a Fibonacci support or resistance zone is violated.
Section III: It Boils Down To Proper Execution
Chapter 11:Entry Patterns: How To Enter The TradeIn this chapter, I will focus on teaching you the best patterns to use in order to trigger entries into trades. These entry patterns can then be applied to any of the strategies that I teach you in this book. Chapter 12: Risk Management: Identifying And Managing The Key Areas Of Risk ControlFinally, I'll wrap up by teaching you the most important principles that enable you to achieve longterm trading success. Now let's get started!
CHAPTER
1
UNDERSTANDING HOW FIBONACCI WORKS
In this chapter, I will teach you the basics of Fibonaccinumbers and how they relate to
the financial markets and trading. Also, I will show you the most important Fibonacci numbers to use in the strategies I'll be teaching you. The Fibonacci numbers series and its unique properties was first written about by a mathematician named Leonardo de Pisa de Fibonacci (11701240). The series starts like this: 1123581321345589 . . . and goes on from there. Basically,the first two numbers are added to get the next number in the series. As you can see, this series goes on forever. What is fascinating about this number series is the ratio that is found when a number in the series is divided by the preceding number in the string (e.g., 8/5 or 55/34). This ratio, no matter where you go in the summation series, is right around 1.618. Over the years, this ratio, 1.618, has been mentioned in writings, essays, and speeches by some of the greatest minds in science and mathematics. Why? Because it is found in the structure of a universal assortment of phenomena in the physical world. This includes nature, architecture, geometry, music, our DNA, and most relevant to us ... the financial markets. My theory is that Fibonacci ratios represent the purest forms of measurement of mass human behavior. It is a barometer for human hope, fear, and greed. For trading purposes, in scientific terms, Fibonacci is the mathematical structure of the growth and decay of psychological interest in a stock, futures contract, or commodity. By understanding this structure, you can identify where the emotional shifts between euphoria and pessimism in the markets will come. That, in turn, can be used by you to identify trading opportunities. ...
THE KEY FIBONACCI RATIOS TO USE IN YOUR TRADING
In the next chapter, I will teach you how to use Fibonacci to find important support and resistance levels. I will show you how Fibonacci numbers are used in specific calculations to make these kinds of projections. What are the best Fibonacci numbers to use? Here they are. Thebasic Fibonacci ratios I use are 1.618 and .618.
13
14
Chapter 1
Besides these two numbers, other derivative ratios that I use in trading are: .382 .500 .786 1.000 1.272 2.618
= =
= =
.618 squared. Also, the ratio between alternate numbers in the Fibonacci sequence is 2.618 or its inverse, 0.382 divide the 2nd number by the 3rd in the Fibonacci sequence square root of .618 1.618 x .618 (also used simply for symmetry measurements)
= square root of 1.618
=
1.618 squared
We will soon discuss the specific ways in which these ratios are used. The important point here is to know which ratios are used and how they are derived. At this point, you should have at least a basic understanding of the background of Fibonacci and the ratios we'll be using. If you are interested in furthering your education in the history of the Golden Mean or Fibonacci, all you need is a computer and Internet connection. There are thousands of articles and materials on the subject. Have fun!
SECTION I THE MOST IMPORTANT FIBONACCI TOOLS 15 .
CHAPTER 2 HOW TO FIND IMPORTANT SUPPORT AND RESISTANCE LEVELS WITH FIBONACCI .
~\ . identify key highs and lows. . c PROJECTIONS A·\ . and calculate Fibonacci price levels. This concept will be the backbone of the rest of the book and will enable you to perform the following Fibonacci price studies. You will also be able to identify a FibZone which is simply my term for a combination of at least three Fibonacci price levels within a relatively tight range. x /' A x \. RETRACEMENTS B B A EXTENSIONS x B ~/ I A x\.When you have completed this chapter. you will be able to look at a chart. \" C 19 . the basic building blocks of all the strategies that I will be teaching you.
These are the key points used to calculate Fibonacci price levels. I am going to provide general guidelines to be followed in choosing these swing levels. we must learn to identify key swing points. A swing high occurs when the current high has a lower high before and after it. A swing low occurs when the current low has a higher low before and after it. Swing points are low or high points on a chart where price reverses direction. Rather than getting into a highly technical discussion of swing points.20 Chapter 2 Before we can even think about calculating Fibonacci price support and resistance levels. .
For swing highs. use the high furthest to the right in the consolidation area. .How To Find Important Support And Resistance Levels With Fibonacci 21 Use This One Question: What if there are multiple lows (or highs) relatively close to the same price due to a price consolidation range? Do I use all of them to calculate Fibonacci levels? Use This One Not This One Answer: No For swing lows. use the low furthest to the right in the consolidation area. if the lows are relatively close in price. if the highs are relatively close in price.
When calculating resistance.22 Chapter 2 Question: When is a swing point not valid to use? Use This One Use This One Answer: When calculating support. a swing high is not valid when there is a higher swing high to the right of it. . a swing low is not valid when there is a lower swing low to the right of it.
It will be my goal to calculate a price support zone with enough strength to stop the price action from going down and reverse it back up to continue the trend that has been in place. we are in an uptrend and the stock has just started to make a move to the downside (A) over the last three days. To do this I need to identify a swing high (A) and multiple swing low points (B). Just apply our general rules discussed earlier. Please note that when we are calculating support levels there is only one swing high and multiple swing lows. This is the exact opposite for finding resistance in a downtrend (one swing low and multiple swing high points). It is the consolidation areas where swing points are most difficult to determine.OCU In the case of this chart.00J ~  32.OCU 300CU 28.How To Find Important Support And Resistance Levels With Fibonacci 23 CREATING FIBONACCI LEVELS Let's look at a few charts to get a feel for what to look for: r(A) 1\1"1111 Here are tricky areas 36. .
12l·000 28.GOO 24. SBe 0·0 . so I used the one furthest to the right on the chart.000 I~(~ t (1) 27. This was a situation where the swing high points were close in price. These are the swings to be used to calculate Fibonacci price resistance.000 23000 22. I look for swing high points (B) to use along with the current swing low (A).000 26. In (1) and (2) below.000 )I ~(A) 19 20. Once a swing low (A) is made in a downtrending stock. 11)]000 I = invalid swing pt. 1 = valid swing pt. 25..000 I To calculate price resistance zones find the last swing low point along with multiple swing high points..000 21. you may ask why I wouldn't use both of those swing points.000 26 13 20 27 Oct .24 Chapter 2 Below is a stock in a downtrend.
. The significant swing points WILL stand out.How To Find Important Support And Resistance Levels With Fibonacci 25 STRATEGY Q&A Question: How many swing points do you use to calculate your Fibonacci levels? Answer: I'll go back as many as eight consecutive swing points. shift to a daily chart. I suggest if you want to go back any further. A c Rule of Thumb: Step back and look at the whole chart in a general way. D) are the last two swing points made in the direction of the trend before forming swing point A (see illustration). The more you do this analysis the quicker you will be at picking up the swing paints and calculating the price levels. The third and fourth (C. I believe there are four swing points that carry the most weight. Question: Are certain swing points more significant than others? Answer: If a trend is in progress. It's not rocket science and should not be a stumbling block to learning to calculate Fibonacci price levels. if you are studying a 3Dminute chart and have gone back eight swing points. So. The first (A) is the swing point that was just made. Beyond that it would be wise to shift to a higher time frame chart to analyze support and resistance. Second (B) is the swing point made immediately before reversing into the trend that is in place.
we can move on to the various types of Fibonacci price studies I use.. the current trend is defined as X:A. we will be calculating key areas of price support and resistance. Retracements First let's take a look at a picture of a retracement: A ' .When price reverses direction from A to B. In a sense it is "recapturing" a portion of the move that was just made.. The Fibonacci ratios I use to calculate retracement levels are: .26 Chapter 2 FIBONACCI PRICE STUDIES Now that we have established how critical it is to the calculation of Fibonacci price levels to identify the key highs and lows on a chart. Through the use of these four price studies. Do not get hung up on the terminology as we will define each of these graphically to give you a solid visualization of what each means. . There are four types of Fibonacci price studies: retracements.786 . it is "retracing" or recapturing a portion of the move from X to A. and .618. projections. and expansions. . \\ . extensions. RETRACEMENTS B B x A A retracement is simply a move in the opposite direction of the current trend. ... In the illustrations above.382.50.
36 $15. Let's say X is $10 and A is $30. When the move from X to A is up and price starts to go down (as in Figure 1. retracements are used to calculate support for B. let's calculate what the range of X to A is: Price @ A: $30 Price @ X: $10 Range Next let's multiply = $20.618 0.00 this range by each Fibonacci ratio: Ratio 0.786 Points $ 7.00 $12.72 . First.500 0.382 0.1).How To Find Important Support And Resistance Levels With Fibonacci 27 RESISTANCE A RETRACEMENTS B B x SUPPORT A Retracements can be used to calculate support or resistance.64 $10.
. The price levels in the table above represent Fibonacci price support decisions.500 0.36 $15..786 Points Pt..500 0.36 $ 20. instead of subtracting from A.00 $10.. the answer would be $17.. B .786 Points Pt. if I were to ask you for the .618 0. x \ RESISTANCE RETRACEMENTS ..00 $12.618 retracement of swing X:A.72 .2 to calculate retracement levels acting as resistance..2. In Figure 1..64 $ 20. B ..64 $14. we would add to A to determine price resistance levels: Fibonacci Retracement Levels Ratio 0.. This time..72 $10.00 $10.36 $15.00 $ 30. take the number (points) from each ratio and subtract it from A. . x SUPPORT // A Finally.382 0..This will provide you with Fibonacci retracement levels: Fibonacci Retracement Levels Ratio 0.00 $10. A $ 7. . which is $30. The exact same analysis can be done for Figure 1.64 $10..72 $ 22.64 $10. A $ 30. / .36 $ 25..28 Chapter 2 A . X is 30 and A is 10.00 $12.382 0.00 $ 30..00 $17.00 $17.618 0.00 $ 7. .00.64.28 So.00 $ 22.00 $ 30...
if I were to ask you what the .95 16.380 41. 15Jan03 21.382 = .786 retracement 16.00% The daily chart of JCOM above put in a key low (X) at 15.786 = 19. A reversal to the downside began.52.52 OTD + 0.71 17.88 of X:A is.11% 17 0 1 X . Over the next 17 trading sessions JCOM traded up to (A) which was a high of 21. .900. 6.90. you would answer So.How To Find Important Support And Resistance Levels With Fibonacci 29 Let's look at a couple of charts with retracements at work.500 = .46 18.618 = . So.15. as soon as the key high (A) was established (with a lower high on each side).88. we could calculate the Fibonacci retracement levels that might act as support and stop the downside movement. Those levels are: .
30 Chapter 2 Below is a chart in a downtrend that just put in a swing low (A). the Fibonacci retracement levels are: .382 . 2Dec02 55.39 Any time a stock is in a downtrend and has just completed a significant low point (A). Again.618 .000 OTD 0. Based on the move from X to A. we can calculate Fibonacci retracement levels.786 = 49. the goal is to determine how much the stock will "recapture" of the recent move down and where it has a likelihood to reverse and go back down.500 . 0.95 .019.20 = 51.34 = 52.00% • X 55.01 I !I~ ) II II A II f 45.06 = 50.
18 . The difference between a retracement and an extension is that an extension recaptures more than 100% of the previous X:A move. Basically.272 and 1. x A .00 Next let's multiply this range by each Fibonacci ratio: Ratio 1.How To Find Important Support And Resistance Levels With Fibonacci 31 Extensions A RESISTANCE EXTENSIONS 8 l/ x SUPPORT 8 . Let's assume X is $20 and A is $30 in Figure 2.618 Points $12.618./ An extension is very similar to a retracement. First. B will go beyond X. let's calculate what the range of X to A is: Price @ A: $30 Price @ X: $20 Range = $10.1.72 $16. The specific ratios I use for extensions are 1. Below is the process to determine Fibonacci extension levels. It is "recapturing" a percentage of the previous move (X:A illustrated above).272 1.
72 $ 36.00.18 Pt. Instead of subtracting from A (like in Figure 2.72 $16.1 was. if I were to ask what the 1. we will add to A to determine resistance: Fibonacci Extension Levels $ 32.18 Pt.1). you would answer 17.82 Ratio 1.72 $16. take the number from each ratio and subtract it from A.28 $13. A $ 20. A $ 30.00 $ 20. Let's look at Figure 2.272 1. Now we can do the same type of analysis to determine resistance.18 Ratio 1. This will provide you with Fibonacci extension levels: Fibonacci Extension Levels $17.00 . which is $30.272 extension level of swing X:A in Figure 2.32 Chapter 2 A RESISTANCE/ EXTENSIONS X B SUPPORT B ~/ X /' A Finally.272 1.618 Points $12.2 where X is 30 and A is 20.618 Points $12. This is a support level.00 So.28.00 $ 30.
10.272 = 71.95 . Over the next 12 trading sessions IGT traded up to (A). So.618 = 68.10 ..100. A 80. The specific ratios we use are 1. Remember.41% 12TO 25Nov02 X 73.21 The daily chart of IGT above put in a swing low point (X) at 73. we could calculate the Fibonacci extension levels that might act as support and stop the downside movement. extensions are basically retracements of greater than 100% of the X to A move. 6.Those levels came in at: 1. 80.272 and 1.21. as soon as the swing high (A) was established.33 1...618. A reversal to the downside began.How To Find Important Support And Resistance Levels With Fibonacci 33 Let's look at a couple of charts with extensions at work.890 9. which was a high of 80.
100.33 and did an immediate reversal and went up over 7 points in eight trading sessions.21 I IGT traded down to the 1.34 Chapter 2 Check this out! A 8o. 1 ° II !IIj . ._ 111 X l 7I 12ID 25N0v02 80.41% rl! III) t Ij II!r ) 73. 15.890 9.272 extension level of swing X:A at 71.
Those levels came in at: 1. extensions are basically retracements of greater than 100%of the X to A move.How To Find Important Support And Resistance Levels With Fibonacci 35 Here is the same stock from a different perspective. A reversal to the upside began.21.21+ t The daily chart of (IGT) above put in a swing high (X) at 78. Here we look to calculate resistance extension levels based on swing X:A. we could calculate the Fibonacciextension levels that might act as resistance and stop the upside movement.40 I I A II 3TD 73.41% 12TD I 80. 4Nov02 78.618. as soon as the low (A) was established. which was a low of 73. Over the next 12 trading sessions (IGT) traded down to (A). Remember.272and 1. So.6_ oro 0.400.81 1.60 ._ 78.40. The specific ratios we use are 1.100.000 2::i\1ov02 9.00% " x .272 = 79.618 = 81. 0.
B = 35. let's assume X = 40. A = 30. //l B RESISTANCE c x Now that we've covered retracements and extensions.00 $16. projections measure the size of previous swings (X:A) in the same direction and project those swings from the current swing beginning at (B). For illustration purposes.36 Chapter 2 Projections c B PROJECTIONS A SUPPORT A . the next Fibonacci study that I use is called a projection.18 . To calculate a projection three points must already be established (X.. 1.618.618. B). The ratios used in this study are . From the figures above. let's calculate what the range of X to A is: Price @ A: $30 Price @ X: $40 Range = $10 Next let's multiply this range by each Fibonacci ratio: Ratio 0.00.000 1. First. and 1..618 1.. A.618 Points $ 6. Projections can be used to calculate support or resistance.18 $10.
B $ 35..618 1.00 $35.18 $10. .00 $ 51.00 $16.2 to calculate projection levels acting as resistance..00 $ 16. X is $30.16 $10.00 $ 35.000 1.618 1. In Figure 3.618 Points $ 6. if I were to ask you for the 1.16 $ 45.. take the number from each ratio and subtract it from B. .. B is $35.00.This will provide you with Fibonacci projection levels: Fibonacci Projection Levels $ 28.18 Pt..How To Find Important Support And Resistance Levels With Fibonacci 37 x C B PROJECTIONS ..00 So. the answer would be $18. A is $40. A . which is $35.18 Pt. The price levels in the table above represent Fibonacci price support decisions.00 $ 35.// B RESISTANCE C Finally.18 Ratio 0.00 . A SUPPORT . The exact same analysis can be done for Figure 3.000 1.. This time instead of subtracting from point B.618 projection of swing X:A from B.82.618 Points $ 6.2.82 $ 25.. we would add to B to determine price resistance levels: Fibonacci Projection Levels $ 41. .00 $18.00 $ 35.82 Ratio 0. B $ 35.
94% 64.02 4.72 1.618. Swing X to A was measured for a total of 4.29 = 60.11 points. 0.83 I lIlt It lid t ~t1 61.830) 3.00.18 ..618) and each of the those numbers where then subtracted from swing B high of 64. 1.000 = 62.050 X OlP np 65.78 11 Hll f II HI II j II Above is an example of a price projection on the daily chart of Johnson & Johnson ONJ).83 to get the following projection support numbers: . This range was multiplied by our Fibonacci ratios (.00% 24A.618 1.000 0.890.89~ B 64.38 Chapter 2 25Mar02 65. 1.618 = 58.
~r I 26. This range was multiplied by our Fibonacci ratios (.60% 12JD Il!.618.61E f \1 I Illilll OTO I 12TD B 13.000 = 21.00( llltll[ III A 1810 18.618) and each of the those numbers were then added to swing B low of 13. 21.618 = 26.400 85.4 points.64 1.831 App I.00. 1.618 = 18.83 .431 ADD Q.43 1.6IE II lj1llil _.100.How To Find Important Support And Resistance Levels With Fibonacci 39 1SOcto1 18. Swing X to A was measured for a total of 8.640 App 1.8.24 to get the following projection resistance numbers: .24 t ~ Above is an example of a price projection on the daily chart of (QSFT). 1.
.09 $ 5. Basically...618. and 1. To calculate an expansion only two points must be established (X. 1. A). let's say X is 50 and A is 45 in Figure 4.........000 1.. .. For illustration purposes.09 .. we project the values from A.00 Next let's multiply this range by each Fibonacci ratio: Ratio Points 0. These price levels will be labeled as (Exp) on the charts.... .... c B x RESISTANCE Price expansions are similar to projections with one small difference. B is not used in this study. expansions measuring swing X:A "expand" that swing further in the direction price is headed using the following Fibonacci ratios: .00 $ 8. let's calculate what the range of X to A is: Price Price @ A: $45 @ X: $50 Range = $5..1.. Instead of measuring swing X:A and projecting it from B..618 1.....•. C EXPANSIONS ' A A SUPPORT .00.40 Chapter 2 Expansions x 8 .618..618 $ 3.. First. .
2.91 $ 40.How To Find Important Support And Resistance Levels With Fibonacci 41 C B EXPANSIONS A A SUPPORT C x RESISTANCE Finally.00.618 expansion of swing X:A.00 Fibonacci Expansion Level $ 41.00 $ 35.00 . X is $30.618 Points $ 3.00 $ 36.00 $ 8.618 1.00 $ 56. take the number from each ratio and subtract This will provide you with Fibonacci projection levels: it from A.09 Pt.618 Points $ 6.18 $ 10.18 $ 50. which is $35. The price levels in the table above represent Fibonacci price support decisions.91 So. the answer would be $41.618 1. if I were to ask you for the 0. A $ 45.000 1. A $ 40.91. Ratio 0.00 $ 16. This time instead of subtracting from A we would add to A.2 to calculate projection levels acting as resistance. In Figure 4. to determine price resistance levels: Fibonacci Expansion Level $46.000 1.18 Pt.00 $ 45.18 Ratio 0.09 $ 5. The exact same analysis can be done for Figure 4.00 $ 40.00 $ 40. and A is $40.
Those concentrated zones are the focus of the next chapter. . and projectionsshould be the first price studies applied to a chart. We also learned the specific Fibonacci ratios used in each of the following price studies and how to calculate each of these Fibonacci price studies: • Retracements • Extensions • Projections • Expansions Mastering these price studies will be essential to your success with the strategies in this book.  ~42 Chapter 2 _ ~_ ~ _  ~ Expansions are a "confirming" Fibonacci study. extensions. It is through these Fibonacci price studies where areas of concentrated price levels will begin to appear. This simply means that the other three studiesretracements. Then utilize this price study to confirm a potential price support or resistance zone. It is imperative to be able to pull up a blank chart and calculate the Fibonacciprice levels. REVIEW In this chapter we learned general guidelines on how to spot significant highs and lows on a chart that will assist us in calculating Fibonacci price support and resistance levels.
CHAPTER 3 USING FIBZONES TO IDENTIFY HIGHPROBABILITY REVERSALS 43 .
780." "clusters. or expansions occur.350 13. Below is the definition of a FibZone.WHAT IS A FIBZONE? Now that we have reviewed the various methods to create Fibonacci price levels.000 17. or futures contract hitting a Fibonacci price support or resistance zone. projections. it is support.41 ).6&0 19.41 21Aug02 39T£ 1'9.250 lOcW2 27 Oct Chart created b Dvnamic Trader (c) 19962001 45 ." "price zones.000 t 28 Jul 12 19 23 30 Sep 13 12." etc. extensions.960 13.030. and if a FibZone is below the current price.8. ·6. commodity. I have coined the phrase "FibZone" to represent these areas.000 11.75013.000 10.000 12. Later. others call "confluence. it is time to shift gears from theory into strategy. • CHKPDD J 3<xt2002 13. you will find that I have defined specific types of FibZones that do carry a unique and different characteristic to the runofthemill "zone.GS3 App 0. FibZone: A relatively tight range of price where a confluence of any combination of at least three Fibonacci price retracements.618 I!:iji~~ t~ti 12.000 13." Below is a perfect example of a Support FibZone . What I call a FibZone. it is resistance. I have coined a unique phrase to describe a notsounique general concept. Almost all of the strategies I trade are based on a stock.000 I II ill! I ::: '9 16 I 16. If a FibZone occurs above the current price.000 1IIIIllt FibZone Ill! 24TD 14.000 1[11111 I' 18.000 IIII! 15.
2002. To do that. ~l 13. Below is a daily chart of AOL.000 ~. The goal now is to create one or multiple Support FibZones where AOL will likely stop declining and reverse up to continue the current uptrend.000 10. the first step is to identify the key high and low points.540 Dec t .260 t 14. Price has just made a swing high point on December 2.000 1.000 ~frtl ~ 8. STEP #1: Identify Key High and Low Points 16.46 Chapter3 Let's walk through an example of how to build a FibZone.000 t Aug 10. Jui 12.
70 High = 17.700 Dec + (Swing Points: Low = 8. 295 Ret 0.786 16. ~/~/l 13. as it has been "violated" and is no longer a valid support leveL STEP #2: Calculate RETRACEMENT levels using swing low points identified in this uptrend and the current swing high point. let's measure from the July 2002 low to the December 2002 high and calculate the various retracement levels. then delete the Fibonacci price level.000 t~ + 8. If the current price on the chart is already below a retracement level.Using FibZones To Identify HighProbability Reversals 47 Now that the key points are determined.000 15.500 12. we can begin to apply our Fibonacci price studies. So. The first Fibonacci price study to apply is a retracement.618 10.89) .000 14.211 Ret 0.667 Ret 0.
48 Chapter 3 This is a continuation of Step #2. STEP #2 (cont. as we have a higher swing low point we will use to calculate additional retracement levels using the October 9 low of 10. there are now a couple of price levels starting to group together.89) . A zone is beginning to form. I 8.): Calculate RETRACEMENTlevels using swing low points identified in this uptrend.272 (Swing Points: Low = 10.185 Ret 1.89.26 High = 17.26 and the December 2 high of 17. As you can see.
47.Using FibZones To Identify HighProbability Reversals 49 Now let's shift to calculating extension levels.618 extension levels that come in at 13. Can you see a zone forming? STEP #3: Calculate EXTENSION levels using swing low points that are higher than current price up to the current swing high. So. Remember. I am concerned with the 1.185 14. 120 2.540 Ret . with the low point from November 20 at a higher level than the current price. 9.272 1 (Swing Points: Low = 14. respectively.62 and 12. an extension is simply a retracement greater than 100%.54 High = 17.272 and 1.618 Ret + 8.89) .
[\\  9.89 and we have a projection or "symmetry" level at 13.272 03 (Swing Points: High: 14.26 High = 17.5 points.39.89) . there has been one countertrend decline from August 22 to October 9 that was 4. 0.80 Low = 10. STEP #4: Calculate PROJECTION levels by measuring previous declines (in an uptrend) and subtract the size of those declines from the current high point. 22Aug02 1\800.618  8185 Ret 1. This simply means subtract 4.000 ~. Opposite for downtrends.50 Chapter 3 Now let's apply a Projection study.120 Ret 2.89.5 points from 17. In this trend up. Project this decline from the current December 2 swing high point of 17.
we did not need to calculate EXPANSION levels. How does this provide you with an edge? The key is to remember that you should never trade on the basis of a FibZone alone. it should be done after the retracements. Note that due to the nature of this chart. If this study can be performed.Using FibZones To Identify HighProbability Reversals 51 IDENTIFYING A FIBZONE Here is your new Support FibZone that will be used to look for long trades. . You will notice that the range of the FibZone in the chart below is spanning a 2 point range. I apply several different entry patterns to the Fibonacci strategies that you will learn in this book. extensions. I will teach them to you in Chapter 11. This applies no matter how many Fibonacci levels are calculated for a specific price level. and projections have been calculated. You should only trade when you have a legitimate entry pattern within the FibZone.
618 0 Ret .893 Ret 1. This would have been a 27% gain for someone who identified an entry pattern within a Support FibZone. 15Jan03 15.65% .390 27. 3. but reversed around 12.000 7.618 Ret .000 14.20and rallied up to almost $16.470 ~12.786 0 12.260 t . AOL traded deep into our Support FibZone.650.211 11.00over a couple of weeks of activity.000 15.000 Nt12.!.52 Chapter 3 Just to play out this example.000 16. 18.
as you have read. I am not looking for a specific ratio. Yes. If a price level is hanging out all by itself on the chart with no other Fibonaccilevels around it to create a FibZone. One page is no problem. But as each additional page is added to the stack. Generally speaking. I continue to go back to the focus of the FibZone. These are specific types of FibZones. do you remove any Fibonacci levels from the chart? of the Answer: Yes. a FibZone can be very wide. though.Using FibZones To Identify HighProbability Reversals 53 STRATEGY Q&A Question: Does the size of the FibZone matter? Answer: To qualify as a zone. I wouldn't want a FibZone on a $40 stock to be much more than 4 points deep. there are four basic Fibonacci studies: Retracements. it becomes more difficult to tear them in half. it needs at least three Fibonacci price levels. 1 equate it to ripping one piece of paper in half or trying to rip a phone book in half. Question: How big can a FibZone be? Answer: Depending on the chart. Question: What Fibonacci ratio is the most important in a FibZone? Answer: A couple of the strategies 1 discuss have specific ratios that must be present. the more important that FibZone becomes. then I will delete that price level. and Expansions. Extensions. Question: After running the Fibonacci studies on a chart. for trading purposes.as the number of price levels that occur in a FibZone increase. For example. Question: Which Fibonacci studies are better? Answer: Well. A tight price area with a large number of price levels represents a trading opportunity. 1 am simply looking for groups of Fibonacci ratios concentrated in a small price range. No study is necessarily better than another. Projections. I try to find charts that provide FibZones that are no more than 10%of the price of the security from the low price to the high price of the zone. . Many times the zone is closer to 5% in the width of the price of the stock or commodity. I just want to see a confluence of Fibonacci price levels (1 don't care which ones) in a relatively tight range. However.
a high point is confirmed when a lower high is made on each side of the high. indicators. Question: When is a zone recalculated? Answer: In an uptrend. That will be the focus of most of the rest of this book. a new resistance zone is calculated when the current swing low point is violated and a new lower low point is made. the key to knowing what zone to trade against will be based on what you use for a "trigger. as well as perform other technical studies. I personally also require a program that allows me to convert a bar chart to candlesticks.. be able to do each study we mentioned earlier. oscillators. A decision point. Remember. a new support zone is calculated when the current high is violated and a new high point is made. by definition. Fibonacci. So. Whatever program you consider. and manipulate the chart with relative ease. how do you decide which one to trade against? Answer: FibZones simply provide decision points in a particular market. Question: What software programs do you recommend using to calculate these FibZones? Answer: There seems to be a new software program coming out every day to address Fibonacci. I believe it is the most comprehensive Fibonacci tool on the market right now. I personally use Dynamic Trader. is a tool that assists the trader in finding support and resistance levels. I think you need to be able to delete lines/price levels that you don't need. that you will use to determine the internals of the market you are looking at and when to actually take a trade." After those decision zones are on the chart.54 Chapter 3 Question: Sometimes there is more than one zone after running these studies. . that's it. it is necessary to have certain patterns. In a downtrend. and a low point is confirmed when a higher low is made on each side. So. and the ability to make notes on the charts. etc.
SECTION II MY FAVORITE FIBONACCI STRATEGIES 55 .
After we walk through all the strategies. and it is in the price action against this FibZone where I look for entries. That means you wait for a trigger before entering a long or short position. Whenever I refer to entries as I teach you my strategies. For the purposes of this book. All of the strategies we'll be discussing involve a stock hitting a FibZone. 2. I am referring to one of the patterns in Chapter 11. I want to state emphatically that you must always wait for confirmation before taking a trade.SPECIAL NOTE BEFORE I TEACH YOU MY FIBONACCI TRADING STRATEGIES Before I begin teaching you my trading strategies in the following chapters. 57 . I will follow up with a discussion and list of the pattern triggers I use to enter trades in Chapter 11. please make these two assumptions: 1. Always use a pattern or some other form of trigger to enter a trade.
CHAPTER 4 HOW TO ENTER TRENDS USING THE TREND TRIGGER STRATEGY 59 .
. . The basic assumption here is that we are trading with the trend and that a normal and natural pullback is occurring. . . . . '. . . . .STRATEGY #1: TREND TRIGGER Trend Trigger is probably the simplest way to trade with FibZones. .(3) (4) (5) (1) 60 . • (6) . and this pullback will stop somewhere in our FibZone and reverse direction.
272 extension hightolow swing made into our FibZone. 6. These levels will serve as profit objectives. The final objective of a Trend Trigger trade is the 1. This structurally confirms we are trading with the immediate trend. of the .272 extension of the hightolow swing into the Support FibZone. a stop loss order should be placed just below the FibZone. This assumes your money management rules will allow you to risk the entire zone. The first profittaking area is between the . Once you are filled. The current bar low must at least touch the top of the FibZone. 5. 4. or reduce the number of shares or contracts to be purchased. There must be at least two higher swing high points and at least one higher swing low point. . range. At this point. trail your stop loss to reduce risk.50. 2. calculate the . do not take the trade until price drops deep enough into the zone to meet your money management stop loss rules.How To Enter Trends Using The Trend Trigger Strategy 61 Rules For Buys (Sells Are Reversed) 1. 3.618. Once a swing low point is determined against the FibZone.618 retracement Once these profits are booked.50 and . If not. and 1. look for an entry pattern to get you into the trade.
and I'm long at 32.00. 4.47.50 and . We have identified two higher swing high points with at least one higher swing low point. I also move my stop to breakeven. 5. The initial stop is placed just below the zone around 31. which is the 1. we calculate the . 2.618 retracement levels. The final objective on the trade is 38.57 and 35.50 and .62 Chapter 4 (4) Trend Trigger Example: Long 1.60 based on the trigger I use. With a swing low in place. which are the . .618 retracement levels of the hightolow swing into support. Price touches the Support FibZone. Profits are taken on half the position between 34. 3.16. At this point. 6.272 extension of the hightolow swing into the Support FibZone.
(4) (2) (3) Trend Trigger Example: Long 1.00 and immediately trail my stop to reduce risk. The final objective.06.80. Price goes lower into the zone over the next couple of days.575Ret .50 and . After making a swing high.63. which is where we take a long position. 4. 6. price comes down and touches our zone at 24. then reverses up out of the FibZone.57 and 26.272 extension of the hightolow swing into support. . is hit and I take the last portion of the long off around 28.How To Enter Trends Using The Trend Trigger Strategy 63 (1) (5) +25.618 retracement of the hightolow swing into support. 3. which is the 1. I take partial profits between 25. Our initial stop loss order is placed just below the zone around 23. 5. We calculate the . 2. We identify two higher swing high points and a higher swing low point.
My stop is at 942.'36 Ret 0.50. Two lower swing lows and at least one lower swing high have been identified.5 points of risk.75. Price hits our first target and half the position is taken off around 916. . we can calculate the . 6.I)OO Trend Trigger Example: Short 1.00.00. 4. 2. Once a swing high is made into the FibZone.618 937.50. so I go short at 927.618 retracement of the lowtohigh swing into our Resistance FibZone. Once the second swing low is made. My stop is moved down to breakeven (especially on intra day trades).nR~tO.50.How To Enter Trends Using The Trend Trigger Strategy 65 J f (3) 941.272 extension of the lowtohigh swing into resistance is hit at 897.SOAppl. These price levels are 916.50 and .61S ~ ============= 'l3S. we can calculate price resistance. Price rallies up and touches the Resistance FibZone. 5. That's 14. The final objective at the 1.50941. That zone comes in from 927. 3.50 and 913.
Be aware of the volatility of the stock. there are situations where moving the stops to that level will get you prematurely stopped out of the trade. Question: How long do you typically hold these trades? Answer: That is always dictated by the market. I've found that a strong ADX reading is an excellent scanning tool. the ADXline is upsloping and not downsloping.66 Chapter 4 STRATEGY Q&A Question: What if a Trend Trigger trade comes up and the FibZone is too large and I am unable to put a stop below the FibZone and risk that much? Answer: Don't take the trade until the stock drops lower into the FibZone (for longs). So. then please don't take it. I would use a 14period ADX of 20 or greater. this is supposed to be a "trend following" strategy. the stronger the trend. If your money management rules don't allow you to take the trade. then I often scratch the trade. the better the opportunity. and avoid placing stops at round numbers or levels too close to the current market price. This just means the reading is continuing to go higher and the trend is getting stronger. Ideally. Question: Are there any confirming indicators to use with this strategy? Answer: By definition. If I find myself looking at a chart where price has hit our zone and it continues to print bars that hover around the FibZone. . The other choice is to still take the trade. Downsloping means the trend is losing strength. as well as a nice confirming indicator. It has been my observation that the best trades bounce immediately out of a FibZone and become profitable quickly. However. Risking too much on one trade will come back to haunt you. We are trying to identify pullbacks into FibZones. but trade fewer shares or contracts to keep your risk in line with your money management rules. Question: Where do you place the stop after hitting the first objective? Answer: Ideally a stop can be placed at your original entry price so that risk can be completely eliminated from the trade.
CHAPTERS THE REFLECTION REVERSAL METHOD 67 .
000 6F. Symmetry: When the current market swing is similar in relation to price and/or time with the previous market swing.000 . we will look at a few examples of Reflection in action. which matched the previous rally that ended March 4. Reflection is a strategy that combines three concepts with our FibZones. With this kind of similarity.Here is a strategy that should lay to rest any doubt you may have about order in the markets. After VZ completed a 6 point rally on May 28. 4Mar02 '" 6PTS PRICE SYMMETRY 6PTS 38. 68 .x02 Feb Mar Apr 29A t 36. Those concepts are Symmetry. 2002. Let's quickly review each of these concepts. Let's look at a couple of examples. and Directional Indicator (01). Average Directional Index (ADX). After our review. 1'02 May Jun Chart created b D namicTrader c 19962001 Above is a daily chart of Verizon Wireless (VZ). or symmetry. VZ sells off more than 7 points over a few weeks with very little countertrend movement. there is a high likelihood for price to reverse direction. 2002. This illustrates the power of price symmetry.
the market had just completed a sixday selloff from high to low. That's over 10%in one week's time. in the markets.The Reflection Reversal Method 69 TIME SYMMETRY TRADING DAYS GTD + GTD + 18 25 19962001 Symmetry. Symmetry that occurs on the time axis can be a precursor to powerful reversals as well. the previous countertrend decline was also six days. After the January 15 low was put in. . The illustration above is a daily chart of the retailer Target (TGT). On January 15. 2002. Coincidentally (or not). but also on the time axis. not only exists on the price axis. the stock climbed over 5 points in a few days.
The dotted line represents a Negative Directional Indicator (DI) and the solid line represents the Positive Directional Indicator (+DI). Again. Readings above 60 are rare. The third and final ingredient to our Reflection strategy is the Average Directional Index (ADX). I have added the DI study to the bottom of the chart. but NOT whether that trend is up or down. be it up or down.. For our study purposes. . . . When the +DI is above the DI.td 2"1A . which measures the force of an uptrend and a Negative Directional Indicator (DI). On the chart of Verizon (VZ) below.000 1 36. " f~ 38. There is a Positive Directional Indicator (+DI)...70 Chapter 5 Next we have the Directional Indicator (DI). we are looking at the Directional Indicator of the past 21 bars. the ADX does not tell you the direction of the trend..J\f' . the trend is up. The DI and ADX originate from Welles Wilder's book New Concepts In Technical Trading Systems written in 1978.. 4Ma. it simply states how strong a trend is..000 Feb DI21'. . which measures the force of a downtrend. Readings below 20 indicate a weak trend and readings above 35 represent a strong trend...s~/ff\~h"" Y~ t~l~h Mar Apr AI1\ '" PRICE SYMMETRY 6 pis r lW1. When the DI is above the +DI. This is an oscillator that moves between 0 and 100 and tells the chart reader how strong the current trend is.02 1 "~flfIf~ ~\l j May Jun Pt1~\.o2 6 pts ~j_ . the trend is down. Most charting software packages combine the DI and ADX into one study.
and Average Directional Index against our FibZones. we will be looking at Symmetry. Directional Indicator. PRICE SYMMETRY Let's summarize.The Reflection ReversalMethod 71 Below is a chart with the ADX study at the bottom. In our studies. For the Reflection strategy. ADX readings of 50 and 60 are rare and typically represent a shortterm blowoff in the trend. we will be using an eightperiod ADX with our reference line at 50. . let me teach you the rules for long and short trades. Now that we have established what each ingredient looks like. As mentioned earlier. a reading of 35 signifies a strong trend.
.618 37.0. 10.. lFeb99 32.100 Ret 0.156 14..5.. ~I+H~I +++..%9 2GTD 1 6Apt'99 40.to intermediateterm trends using the ADX and DI that are in the process of pulling back into a FibZone.000 OTD 1 19Mat'99 39.688.609 Ret 0....500.500 (6) .818 Ret 1. The kicker here is that we are looking for the pullback to be symmetrical in time or price with the previous countertrend swing.72 Chapter 5 STRATEGY #2: REFLECTION The goal with this strategy is to find strong short. It is this symmetry that triggers powerful reversals.. ttl 38..272 (7) 1'1:....688..51% 8TD 1~ (1) 0 40...
find the previous significant countertrend decline. wait for a swing high point to form. At this point. Measure the amount of time that countertrend lasted and the number of points it declined from high to low. this will give us a stock that is strongly trending and is trending up based on the +DI oscillator reading. Using retracements. . Between the ADX and +DI. look to buy on a trade above the previous day's high. 8. 4. 2. extensions. or as close to breakeven as you can get based on the price action. This will establish the price symmetry point and help us to focus on a specific Support FibZone to look for a trade against. At swing point "C. The high point will be labeled A. After #1 is complete. Fibonacci price support levels based on the high point C calculate 6. The eightperiod ADX must cross above 50. projections.618 retracement of high point C to low point D made into our Support FibZone. 9. 7. One addition that we will add to our normal Fibonacci analysis is measuring the size of Swing A:B from #4 and projecting that price rally from swing high point C. and expansions. 5. This swing point will be labeled "C" 3.The Reflection Reversal Method 73 Note: In other chapters. After items 1 through 3 have been established. The first objective on this trade is between the . Rules For Buys (Shorts Are Reversed): 1. I illustrate strategies using a diagram. Once price hits our Support FibZone." the 21period DI should show the +DI line above the DI line.50 and . The initial stop will be just below the Support FibZone. trail the stop to breakeven. I will use an actual chart (shown on the previous page) of real price action instead. Due to the combination of indicators that the Reflection Strategy uses. from point C. and the low point of this countertrend rally will be labeled B.272 extension of high point C to low point D made into the Support FibZone. 10. The final objective is the 1.
74 Chapter 5 (6) 84.260 Ret 1.272 .
We'll come back to this.272 level is hit would be to trail the stop to the previous bar's low. which happens to fall within our Support FibZone. is hit at 84. 4. confirm that the 21period +DI is above the DI line.22 to 82. 6. A swing high point is formed just under $84. Now we can calculate the .3 point decline and project it from the point C high. if it develops. That price level comes in at 82. That way it allows you to potentially participate in a much larger move. Our entry in this scenario was 83. but it does keep you in a winning trade. 10. 2.3 points. 9. so we can continue with the setup. This is typically where we take partial profits and trail up our stop. which is the 1. Remember our measurement from #4? Let's take that 1. The downside is that you could give up gains as well. I wait to take the entire position off at the 1. it is.78. or to the swing low point made into the Support FibZone.26 for an approximately 1 point gain in three hours of trading. It is labeled A:B with A being the high point.272. The eightperiod ADX crosses above 50. it is time to calculate Fibonacci price levels and construct a Support FibZone. Price hits our FibZone and begins to reverse. Note that an optional money management technique once the 1. Once price starts to reverse to the upside. this is a scenario that often occurs on lower time frames where there really isn't a gain to lock in at this point. 7. we can label the low point into the Support FibZone as point D.272 extension of swing C:D. The only action item here would be to trail the stop to higher levels. The final objective. . so I do not take any profits there.87. This is called the Symmetry level. At point C.618 retracement of the move from C to D. Now go back to the previous countertrend decline. 8.50 and . This zone comes in from 82. This countertrend move was three bars (each bar was 60 minutes) and a total of 1. 3. A long trade is entered on a trade above the previous bar's high AFTER hitting the Support FibZone. ideally to breakeven.39. 5. However. but it is critical to identify the amount of time and the size of the previous decline. With the high point in place. This point will be labeled point C.The Reflection Reversal Method 75 Reflection Long Example 1. A stop is placed immediately below the Support FibZone. In this case.
76 Chapter 5 (10) 34.96 (7 ) 2 6.000 13TD ·20.618 ltt II" .79& Ret 0.930 App 1.97% 25 ·6.0 pts (9) 30.507 Ret lob 18 25..320 Ret 0.786 26.6~0 t o ti:J<8J .500 '11 (5) \ 27..272 rt c l \ 1 ~~ 6.&10 Ret 0. 2~.257 Ret 1.
. .. 36... .15 (7).. !II4. _ ..233 Ret 0. / ~ .~._ .78 Chapter 5 (8) 13."I+II!tf>~iU1 (6) (~1Itq A (2) ~'". ......6 PTSJt . :~ 42.618 0 (10) .n...
9. One addition that we will add to our normal Fibonacci analysis is measuring the size of Swing A:B from #4 and projecting that price rally from swing low point C. 2. from point C. At this point. Once price hits our Resistance FibZone. extensions. projections. look to short on a trade below the previous day's low. Rules For Shorts (Buys Are Reversed): 1..272 extension of low point C to high point D made into the Resistance FibZone. 10. find the previous significant countertrend rally. or as dose to breakeven as you can get. calculate 6. 5. and the high point of this countertrend rally will be labeled B. Fibonacci price resistance levels based on low point C. 8.50 and . This swing point will be labeled "c. The eightperiod ADX must cross above 50. This will establish the price symmetry point and help us to focus on a specific Resistance FibZone to look for a trade against. based on price action. and expansions. Measure the amount of time that countertrend lasted and the number of points it rallied from low to high.The Reflection Reversal Method 79 Now. At swing point "C" the 21period DI should show the DI line above the +DI line. The initial stop will be just above the Resistance FibZone. Between the ADX and DI this will give us a stock that is strongly trending and is trending down based on the DI oscillator reading. The low point will be labeled A. The first objective on this trade is between the .618 retracement of low point C to high point D made into our Resistance FibZone. 4. After #1 is complete.. Using retracements. wait for a swing point low to form. referring to the chart on the previous page . 7. . After items 1 through 3 have been established. The final objective is the 1." 3. trail the stop to breakeven.
80 Chapter 5 4Mar02 3~.270 15.<I4SRet 1.5<14Ret 0.560.37% 17TD l (4) IT] (a) ~U~9~~IB:~9~ D 37. %2 Ret 0.786 3~:~~ ~@l ij :§8~ ~s:~~~~W:tm 3502+(7) A (6) 33.250 Ret 0. 5.618 :1 28.272 (10) .516 Ret 0.500 32.618 35.
3.50 and .41 to 38. 9.41. 5. Our entry in this scenario was 35. This is where we take partial profits and trail our stop. it is time to calculate Fibonacci price levels and construct a Resistance FibZone. This point will be labeled point C. Once price starts to reverse to the downside. That price level comes in right around $35.14. is hit at 28.44 for approximately a 6.00 for a 2 point gain and a stop is trailed down to either a previous swing high point or breakeven. The final objective.The Reflection Reversal Method 81 Reflection Short Example 1.02. but it is critical to identify the amount of time and size of the previous rally. This is called the Symmetry level. Remember our measurement from #4? Let's take that 5. A short trade is entered on a trade below the previous bar's low AFTER hitting the Resistance FibZone. So. 7. so we can continue with the setup. go back to the previous countertrend rally of significance. A stop is placed immediately above the Resistance FibZone. we can label the high point into the Resistance FibZone as point D. 8. Above it is labeled A:B.3 point rally and project it from the point C low.272 extension of swing CD. At point C confirm that the 21period DI is above the +DI line. Now we can calculate the . Price hits our FibZone and begins to reverse.3 points. half the position is covered around 33. 4. which is the 1. This zone comes in from 35. The eightperiod ADX crosses above 50. 2. which happens to fall right at our Resistance FibZone. A swing low point is formed at 30.5 point gain. with A being the low point. 10. Now. In this case it is.82. With the high point in place.618 retracement of the move from C to D. We'll come back to this. 6. . This countertrend move was 17 days and 5.
Then occasionally I would hit a home run on the last half of a trade that kept moving in my direction. I do know that some software programs are working on perfecting the time symmetry scan. That's one of the reasons I like these strategies. They are not easily put into a box. Sure.82 Chapter 5 STRATEGY Q&A Question: Is there a mechanical way to scan for symmetry? Answer: To my knowledge. but I eliminated losses. there is no software that can scan for price symmetry. I found that stocks or commodities would reverse at this level and many times stop me out for a loss. That's trading! . I not only added some "base hits" of profits to my bottom line. Question: Why do you take partial profits between the . When I started taking profits and trailing stops at this level. there are cases where I get stopped out prematurely and price keeps moving in the direction I wanted.618 retracement levels? Answer: Trading this strategy.50 and .
CHAPTER 6 TRADING PULLBACKS USING THE TRIPLE CROWN STRATEGY 83 .
..786 . the Triple Crown... There are three swing points that we need to be concerned with in this strategy from which the ratios are derived...618 It is a specific combination of these three Fibonacci retracement levels that identify potentially powerful reversal areas in any tradable market with liquidity.....................786 . (4) L..._ / Swing Point: A ___.50 ...STRATEGY #3: TRIPLE CROWN After analyzing thousands upon thousands of Support and Resistance FibZones and analyzing what the characteristics were of those FibZones that provided some of the most powerful trading opportunities...................... In the case of looking for long trades._L.. Swing Point: C ~ (1) ..... we identify the most recent swing high point and the two most recent swing low points....~" Swing Point: B Zone " ...618 (3) > The Triple Crown (2)...50 ..+.......... . A Triple Crown is comprised of three Fibonacci price ratios which occur in this specific order: . I have found a combination of Fibonacci price levels based on a specific set of swing high and low points that are combined to create what is one of my favorite strategies.
Once the first half of the position is stopped out . place the stop at the original entry (breakeven). Again. There is more subjectivity and discretion to this stop. 785.. This allows for potential home run trades and gives room for some volatility. continue to trail the first half stop to the previous bar's low. 8. Label this point C.50 and . which is labeled point D (because A. 7. At the same time. To be a valid Triple Crown Zone (TCZ).786 retracement of low point B to high point C.618. the order from the top of the zone to the bottom is . Once it does hit the TCZ. our Trailing Stop Plan takes effect: • Place a stop on half of the position at the higher of the previous bar low or the original entry price (breakeven). ." The swing low that is lower than B will be labeled "A.618 of low point A to high point C. and now we wait for price to come down and touch our TCZ. 4. . we can calculate the 1. When this Fibonacciprice level is hit (which. This price level serves as a trigger to initiate the trailing stop game plan. 5. 2. • On the other half. calculate the . There are only three Fibonacci ratios we need in this strategy. Initial stops are just below the TCZ for long trades." then we have a TCZ. So. Once the swing point is made into the TCZ.50.618. but not to be foolish and tum a winner into a loser. means the trade is working for us). I look to buy above the previous bar's high. and C are the swing points used to calculate the original TCZ). but the idea is to give the trade room to breathe. A stock has formed a swing high point with a bar on each side with a lower high. As a higher high is made. first calculate the . B. the . 9..Trading Pullbacks Using The Triple Crown Strategy 85 Rules For Buys (Shorts Are Reversed) 1. 6. If the order of the Fibonacciratios are "valid.786 retracement must fall between the .50 and ." 3. by the way. Identify the two previous low points that are below the current bar's low.272extension of Swing CD. So. Label the low point closest to point C as point "B. • Start trailing the last half of the position at swing low points as price moves up. only if you make new highs do you move the stop to the previous bar's low.
we have identified a TCZ.86 Chapter 6 A = 76.f~§~~t .80.618 retracement of A to C and the . a long trade is initiated just above 79.786 retracement of B to C. 5. Go back and label the previous two swing low points A and B.50 B = 77.il~1i § (3) Triple Crown Long Example: 1. 4.80 to strengthen our TCZ. we also have a symmetry level at 77.50 and .80 D = 77. The initial stop on this trade will be just below 77.95 81.500 l§. High point C is identified.575 Rd 1. 2.53 C = 80. In fact. Price hits the TCZ.11. . In this case. and I'm looking to buy above the previous bar's high.272 78. After calculating the . 3.650 Ret 0.
95 86.00. it is time to calculate the 1. In this case. Trail the stop on half of the position to the previous bar's low at 80. I first trail the stop up to 84.272 extension of the C high to the 0 low. 8.80 0=77. continue trailing half of the position's stop up to the previous bar's high. That comes in at 81. but still give the stock room to run. As higher highs are made. 7.272 ratio price level is touched.57.48 after the 1. Now let's tum our focus to the stop that is sitting down at breakeven around 79.Trading Pullbacks Using The Triple Crown Strategy 87 A = 76. .91. and half of the trade is finally stopped out at 87. Once low point 0 is established and price starts to reverse up out of the TCZ. 9.15 Triple Crown Long Example: 6.15 where I am ultimately stopped out of the final portion. Over 7 points of lockedin gain.50 B = 77. Price then makes a higher swing low point at 86. We are now focused on actively managing half of the position.11. as we want to trail it up to a previous swing low point. This goes on for quite a few bars.53 C = 80. This final stop placement is a bit more subjective. The other half of the trade moves to breakeven.
88 Chapter 6 A = 45. In this case. Go back and label the previous two swing low points A and B. 3.50 and .38 0=52.ooe (4) =='1I'===========sHas~~! '===========51. 2.786 retracement of B to C. we have identified a TCZ. The . Price hits the TCZ.84.840 (0) (3) \ (5) (Al Triple Crown Long Example: 1. but when it is within pennies like this AND we have a symmetry level at 51. 4. and I'm looking to buy above the previous bar's high. High point C is identified.40. I will consider it a valid TCZ.00 (1)~ (el tl 11!~~n~ 55.79 B = 50.40 !.50.90 C = 59. tit [Ill Itl ~:l t 11111 8:s~1l APD l.618 retracement of A to C and the . . 5.786 is slightly above the .B2 55.98. After calculating the . a long trade is initiated just above 55. The initial stop on this trade will be just below 50.
Once low point 0 is established and price starts to reverse up out of the TCZ. That comes in at 61.23.90 after the 1. price reverses and half the position is stopped out at 58.82 when the first half of the trade is stopped out. Price then makes a higher swing low point at 57. We are now focused on actively managing half of the position.Trading Pullbacks Using The Triple Crown Strategy 89 (B) Triple Crown Long Example: 6. 9.as we want to trail it up to a previous swing low point. 7.40. . Now let's turn our focus to the stop that is sitting down at breakeven around 55. As soon as the 1. S. Trail the stop on half of the position to the previous bar's low at 58.38.5 point profit on half.272 ratio price level is touched.35. I first trail the stop up to 55. but still give the stock room to run.90 for a 3. The other half of the trade moves to breakeven. In this case. so I move it up. This final stop placement is a bit more subjective. Then a final higher swing low is made at 58. it is time to calculate the 1.272 is hit.272 extension of the C high to the 0 low. where I am ultimately stopped out of the final half of the position.
The initial stop on this trade will be just above 849. of A to C and the . 5. In this case. ::: ~:~! ~. 2.75 on this fiveminute chart.25 C = 845. 3.786 4. .250 649.250 (~) 650.so ~ 845. Low point C is identified. After calculating the . a short trade is initiated just below 847.  .50 and . and I'm looking to short below the previous bar's low.25 B = 850.25 Triple Crown Short Example: 1.75.r~J \1 \~f~n'(4) f (1) • (C) ~1~ ) ?~'O (====2) ============1 ====================::~:~:._  ~     _ _   ~      _ 90 Chapter 6 652.75 D = 849. Price hits the TCZ.25 A = 852.618 retracement retracement of B to C we have identified a TCZ. Go back and label the previous two swing high points A and B.250 ~ ~ (5) ~.wo~o .
Trail the stop on half of the that would be the same as moved down to breakeven.Trading Pullbacks Using The Triple Crown Strategy 91 SSt.767RetO. 9.25 Triple Crown Short Example: 6.75. That's $600 per contract from a fiveminute chart. and I'm able to trail half my stop as we make new lows down to 843.25. where I'm stopped out of the last half for a 12 point profit. Once high point D is established and price starts to reverse down out of the TCZ.250 852.75.25 B = 850.272 extension of the C low to the 0 high. of the position as the Emini position to the previous bar's high.250 CAl J =r. I trail down three more times from 841. then to 840.75 point gain on a fiveminute chart. That comes in at 844. 7.75 D = 849. 8.:===============~4§:ag6~~iR§8 e49. It looks like the swing point at 843 is a good swing to use. Price continues down. so the whole position's stop is We are now focused on actively managing half S&P 500 futures make new lows.151 A = 852. then to 842. . where I'm stopped out of half the position for a 7. it is time to calculate the 1.25 C = 845.25 to 837. our entry point.250 84 . and finally to 835. In this case. Now let's shift to trailing the last half of the stop down.
The initial stop on this trade will be just above 47.060 ApD 1.991]7.89 C = 41.618 47.19 on this daily chart. 3. Go back and label the previous two swing high points A and B. S. we have identified a TCZ with a symmetry price level at 46.500 46.400 .J.06 to strengthen our zone.26 D = 46.255 Ret 0.500 . and I'm looking to short below the previous bar's low. After calculating the . Low point C is identified. 39. In this case.95 B = 48.00e A 51. 2.J.J.92 Chapter 6 44.J. 47.86. . a short trade is initiated just below 45.430 42.863 Ret 0.52 = Triple Crown Short Example: 1.786 46.50 and . . 4. . Price hits the TCZ.600 Ret 0.786 retracement of B to C.618 retracement of A to C and the .
70 to 39.272 (7) (6) A = 51.99 to 37. we need to focus on the other half of the position with a stop at breakeven and move it down. It looks like the swing point at 44.817 "+1. and move the other half of the position's stop to breakeven at 45. it is time to calculate the 1.40 for over 2. That comes in at 39. As soon as this stop is activated.43 is a good swing to use.Trading Pullbacks Using The Triple Crown Strategy 93 (8) (8) 39. B.95 B = 48.26 0=46.19. Unfortunately on the first half of the trade.89 C = 41. and we are stopped out at 42.50 and finally to 30.43 where I'm stopped out of the last half for over 15 points of profit. 7. The stop is trailed down three additional times from 41.81. trail the stop on half of the position to the previous bar's high. Once QQQ trades down through the 1.272 extension of the C low to the D high. The trailing stop did its job in this case and allowed us to capture a much larger profit.272 level.52 Triple Crown Short Example: 6. Once high point D is established and price starts to reverse down out of the TCZ. .5 points of profit. Now let's shift to trailing the last half of the stop down. That's the goalto put ourselves in the position to participate in a move like this one. price reverses back up against the short position. 9.
You'll be pleasantly surprised. I have noticed that it also identifies other solid patterns like Cup & Handles. and the list goes on. • It is simple to calculate. You only have to look at three swing points and use three Fibonacci ratios. . which many times yield great reversal opportunities. • When these trades work out.94 Chapter 6 This is definitely a favorite strategy of mine. The TCZ identifies consolidating areas that are set to explode. they REALLY work out! With our stop strategy. Bottom line: This specific Fibonacci price zone is very important! Spend some time with this Zone and watch it work. Triangles. • The Triple Crown identifies many different patterns and market conditions that set up for reversal. it allows these profits to run and compound. It identifies Head and Shoulders pullbacks to the neckline. Why? • Risk is defined and relatively tight. This translates to small losses on losing trades.
Trading Pullbacks Using The Triple Crown Strategy 95 STRATEGY Q&A Question: How far below the TCZ do you allow price to go to still consider the zone valid? Answer: The situation where this arises most is an intraday move that slightly violates the Zone. A second dip through the zone is all she wrote. Question: How did you come up with the trailing strategy? Answer: I was taking profits way too early on trades that would just make tremendous moves out of these zones. and worst case (assuming no crazy gap moves). Then I found that in choppy markets. Question: If this Zone is so critical. Another requirement is that price cannot go higher than the high or lower than the low made past the TCZ. I am a simple guy. Then I could tum off the screens and let the charts do what they may. I came up with this money management strategy that would put some money in my pocket relatively quickly and take my stop to breakeven. I get stopped out at breakeven. I give it one chance and one chance only. When a TCZ is broken. . what happens when it is broken? Answer: Great question. I was losing more. I would likely agree. it quite often creates a momentum move in the direction in which the zone was broken. If it looks like it has not violated the zone by too much. after some hit and miss. So. So I started holding the entire position for longer periods of time. but at least I'm in the trade for a potential home run.
CHAPTER 7 TWOSTEP PATTERNS (TSP) .
_oo "10.400 14.14:20 44.550 4Oc14:40 4. The first part of the pattern is Swing A:B.0. In this chapter I first want to give a general description of the twostep pattern and how it ties into what is called the Theory of Parallel Channels. 3•8OO 3•6OO l' 43.000 1~ A OSars r.800 I 1\ C 4 Bars 0 ly1 l' 4MIO.000 40(13:50 chert created by Dynamic Trader c 19962001 . The name "two step" comes from the fact that there are two swings that move. There are three variations of this pattern that we will discuss in detail.680. Then the third and final move is swing CD.200 44.STRATEGY #4: TWOSTEP PATTERNS (TSP) The best way to understand a TSP is to look at a picture of it. or "step." in the same direction.II'l: ~ 44. I will describe in detail three specific types of twostep patterns (TSPs) that I use to trade with against FibZones. All of these patterns create powerful trading opportunities because it is a pattern that takes advantage of "weak hands" and a "don't miss the boat" mentality exhibited by the masses.&90.770 + 14.770 6 B~r3 "IOc15:00 4B.600 4. r. The second move in this pattern is a small pullback in the opposite direction of swing A:B to point C. Secondly.<160. II Bullish TSP II M5FT 51 Bearish TSP i~O~t1l? fri r~.0. ·0.0. which finds price trading beyond swing point B to make a new high or low.
. The reason it is called a Bearish T5P is because we anticipate price going down from point D. We will discuss these differences and characteristics in detail. and price is likely to trade up and retrace a percentage of the C to D move and most likely go up a similar point size of the move from B to C. TwoStep Patterns (TSP) 99 A basic twostep pattern looks like charts (1) and (2) below Bearish TSP (1) A A A to B = Step #1 C to 0 = Step #2 The concept behind a twostep pattern is that price trades within a channel in the direction of the trend. For example. the trend is down and the channel that price is trading in is down. when price moves up from C to 0 and makes a new high. when D hits the channel. . looking at the example of the Bullish TSP. On the flipside. So. So the logical place for price to trade after hitting point 0 is to make a similar move down like it did from B to C. What differentiates our three TSP patterns is the size of each of these steps: A to Band C to D. it is hitting a form of support. it is hitting a new high at the top of a channel that acts as resistance on price. in the case of a Bearish TSP.
The size of the move from A to B is equal to the size of the move from C to D.We take the general twostep pattern and give definition to each step. The equation is A:B = C:D.100 Chapter 7 Capture Strong Trends With The Symmetrical TSP Now that we have defined what a twostep pattern is. The first is called a Symmetrical TSP. A Bullish TSP o t (6) . we can dig into a few variations of this basic pattern.
7. The objective on these setups falls within the 1. we will look for price to stop going down based on two items.TwoStep Patterns (TSP) 101 Rules For Buys (Shorts Are Reversed) 1.272and 1. a Support FibZone is calculated and defined. 6. First. Initial stops on these trades will be below the Support FibZone. Once point C is established.786 retracement of swing A:B. 2. Second." 5. point C must not exceed the .) For the example. (See Chapter 11 for discussion on possible entry techniques. the trigger will be a trade above the previous bar's high. After low point B is violated. 3. This swing will be labeled B:C.618 extensions of swing AD. 4. A pullback in the opposite direction of swing A:B is then made. Price must now trade below point B. it is "all clear" to look for opportunities to take a long trade. A swing down is made that will be labeled A:B. the swing down from A to B is measured and projected from point C to determine what we will call the "Symmetry Level. . price again reverses to the downside. Once the requirements of the setup are met and price trades down to the "symmetry level" within the Support FibZone. Ideally.
Price rallies from B to C.000 ~~:ll~~~l~:~~~ C to D  o zs . I call this the symmetry level.410 App 1.102 Chapter 7 A Symmetrical Swings AS = CD c (3) A ===========~=t= 'l:t(4) to B = 5 pts =5 pts 27. After establishing point C. . That price level is 27.41.228 Ret r. Sep 13 27 19962001 Chart created Symmetrical TSP Setup: 1. High point C does not exceed A. price reverses down and goes below B.s rs '3 le. we project a 5 point decline. A move down from A to B. 2. 3. it's time to look for an opportunity to go long and for price to reverse to the upside. The move from A to B was 5 points. 4. From point C. With three other Fibonacci price levels around our symmetry level.
Verizon (VZ) traded up almost 50%.22S Ret 1. Trade objective was between the 1.959 Ret 1.E. Those prices were 35. .iB OTt 2E.618 extension of swing A:D.iS 35.. 0. The long trade was taken around $28.272 and 1.95 to 38.. Initial stop was placed just below the Support FibZone around 26.E.464 Ret i. 5.750. 6. or 11 points.46.000 '\(6) 1 Symmetrical TSP Result: The result of this symmetrical twostep was quite powerfuL In 16 days. 7.272 A to 8 C to 0 =5 = pts 5 pts  D 2E.20.TwoStep Patterns (TSP) 103  3S.
High point C does not exceed A. Price rallies from B to C. From point C.6 point decline. After establishing point C. price reverses down and goes below B.500 8 15 Symmetrical TSP Setup: 1. we project a 1.25.18 13. it's time to look for an opportunity to go long and for price to reverse to the upside. where CD is symmetrical with A:B. I call this the symmetry level. The move from A to B was about 1.6. 3.804 Ret 0. 4. 2.500 3.104 Chapter 7 (1) I o 13. With five other Fibonacci price levels (Support FibZone) around our symmetry level.6 points. That price level is 14. A move down from A to B.000 2. .
618 extension of swing A:D.75 points. 5. Notice the day after point D is formed.77. 7. Those prices were 17. and in 9 days. Trade objective was between the 1. Boston Scientific jumps higher at the open. 17.023 Ret 1. 6.70.777 Ret 1.TwoStep Patterns (TSP) 105 (7) <. Initial stop was placed just below the Support FibZone around 13. A long trade was taken around $15.272 A r tf ~ B ~(5) D i~:i~~ ~~p~~ 13 .804 Ret 0. . BSX traded up over 26% or 3.50.618 f 17.618 \(6) Jan 12 Symmetrical TSP Result: The result of this symmetrical two step was also quite powerful.272 and 1.02 to 17.
  .//~ //// o > ~ ..(4) /~/// // (3) A .. Bearish TSP (6) ..106 Chapter 7 Let's reverse the scenario and look for short trade setups.......
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