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Monday
Dec232013

Can Prodigio Do Fibonacci Retracements?

Fibonacci, the magical numbers that everyone hears talks about at one point or another in their trading.  Does it make sense to try and use Fibonacci in Prodigio.  My take is that especially in the case of looking at retracements, why not.  

 

 It is startling how often Fibonacci numbers can and do occur in nature.  They also often seem to coincide with pivots on the charts in trading.  So using a Fibonacci number to set the line does make some sense or at least I don't see a reason not to use them to set some of the lines in my strategies.

 

When looking for a retracement we are really just looking to draw a line in the sand and saying if it comes back to this line then I am going to think about doing something.  Just touching or crossing the line is not enough for me.  I also want to see a clear pivot back to the original direction before I take the trade.  So for me the line is just a measure of the retracement.  Did it come back far enough for me to consider it a dip.

 

 

 

 

 

 

So what are these Fibonacci numbers anyway?

Fibonacci numbers are a sequence of numbers that you get when you add two numbers together to get the next number in the sequence.  You get the sequence by starting with 0+1=1, 1+1=2, 2+1=3, 3+2=5......etc.  getting the following set of numbers  0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144....., etc.  But we are looking for a set of numbers that will guide us in measuring a retracement between a pivot High and Low, and give us possible key pivot points in between to consider.  Those numbers are the Fibonacci Ratios.  

 

The Fibonacci Ratios are calculated from the Fibonacci numbers by dividing the numbers backwards through the sequence. 89/144=0.618055 or rounded to 61.8%.  The next ratio can be found by taking the second number back, 55/144=0.38194 or 38.2% and then the third number back 34/144=0.23611 or 23.6%

 

Part of the magic in this sequence is that it doesn't matter where you start calculating the ratios, they come back to approximately the same set of ratios, so starting at 89 and working back you get  55/89=0.6179 or 61.8%  34/89=0.38202 or 38.2% etc.

So the set of numbers we use to draw our lines in the sand are 23.6%, 38.2%,and 61.8% and we throw in a 50% line so the media can talk to the general public about it.   And then there is the 76.4% or 78.6% lines that are thrown in because we want a line to break up the space between 61.8% and 100%.   I've seen a lot of argument about which is the better line to use 76.4% v.s. 78.6%?  76.4% comes from subtracting 23.6% from 100%.  And 78.6% is the Square Root of 61.8%. To my mind it probably doesn't make a lot of difference and with the basic rule I am going to write here you can use what ever values you want.

The first thing we need to know is what we are retracing from and what we are retracing to.  This is probably the hardest part of doing retracement calculations of any type.  To make it simple we will use the Highest High node to look back to get the last Highest High and the Lowest Low over a period that precedes the high.  This works well for stocks that have a fairly defined cycle but it can get a bit confusing about what peak or valleys is being used.  I will talk about a better way to refine the pivot peaks and troughs in a later article.  

So here is the basic layout of this rule.

Where the range we want to look at is found by finding the difference of highest high over a 14 day period and the lowest low over the previous 14 day period.

 Note: the 14 period length is the default and is only a starting point.  It does match the chart above fairly well though.

Now to set our line we use the Scale node,  in this rule I used 0.618 and subtracted the result back from the highest high to set the 61.8% retracement line.

Then the last part of the rule is just testing to see if we have crossed that line.

I used the 15 minute OHLC so I would be testing the line every 15 minutes to get intraday signals.

 

Additional thoughts:

With this basic rule I would use it to set a Flag or change the Cross Below to a Less Than and use a second rule to trigger a confirmation of the movement.

Also note that you should some how test for trend as using this rule by itself in a down trend probably would not work too well.

 

More information on fibonacci numbers:

A couple of weeks ago I listened to a presentation by Carolyn Boroden “The Fibonacci Queen”.  She has an approach to the market that combines multiple Fibonacci signals to find strong correlation areas to work from.  She has a book in the ProdigioUS Book Store,  http://snip.ps/FiboQueen.

 

There are lots of books on Fibonacci in the Book Store http://snip.ps/FibonacciBooks

 

Information can also be found at:

Fibonacci number - Wikipedia, the free encyclopedia

Fibonacci - Wikipedia, the free encyclopedia

What is Fibonacci retracement, and where do the ratios - Investopedia

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Do you have any questions or coments?  Please use the comment section below or the new G+ section here.

 

 

 

 

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