Using Fibonacci to Find Profitable Trades

09/15/2007 12:00 am EST

Focus:

Todd Gordon

Founder, TradingAnalysis.com

Todd Gordon, currency strategist and active trader, FOREX.com, advised traders that the key to profitable trading is a three-part ‘hit list’: psychology, analysis, and strategies.

He opined that emotions sabotage your analysis and trading, causing traders to see the market as they want it to be, not how it actually exists. With this knowledge you can work to profitably exploit the market’s emotion while controlling yours.

Of utmost importance is to have a plan–every day–so that you can see your trade before you put it on. Gordon likes to plan his trade three hours before executing it.

He advises traders to stick with your familiar markets, and each day, ask yourself, ‘is today likely to be a range or trend day’? And to do that, he uses the Elliott Wave Theory, a discretionary-based–not a systematic, rule-based trading–methodology.

Gordon then reviewed the advantages of using Elliott Wave principles in trading:

  1. Quickly identify current market ranges or trends
  2. Know price developments that validate/invalidate your anticipated outcome with range or trend
  3. Pinpoint stop limit placement
  4. Quantify traditional technical price patterns
  5. Help gauge market emotions
  6. Help you trade with the trend or have a very good reason to fight the trend

He then demonstrated how to derive Fibonacci numbers and retracements and then use them in conjunction with Elliott Wave to project the end of waves as well as the beginning of new waves.

Gordon closed his session with a few nuggets of advice:

  • Don’t risk big losses
  • Be patient with your entries, and don’t chase the trade
  • If the trend of the market is up, look for three Fibonacci price levels to agree before buying…then, once you see a five-wave advance, take one-half of your profits
  • Identify your zone; his is usually no more than ten points

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