Welcome to The Stock Market Millionaire Podcast, episode number 28: Technical Analysis of Financial Markets Using Fibonacci Patterns. So let’s go ahead and jump right in. So, how does Fibonacci play a role in the technical analysis of the financial markets? You know, just like any other technical indicator will play a role in what’s going on in a market or in a stock’s picture, in its life cycle of what’s happening right now, Fibonacci plays a tremendous role in there. And, understand if you know the background of Fibonacci, and when I ask at an event who’s heard of Fibonacci before, outside of the market, if you’ve heard me talk about it, most people’s first learning of it is not the stock market. It is, “I watched the DaVinci code,” or “I’m a math person,” “I know what Fibonacci are,” or “I’m an artist or a contractor and I build based on these ABC ratios,” and you know, you see it everywhere in life. Science, art, music, everywhere you go, you see Fibonaccis.
When we tie it back into the market, it’s a technical indicator that allows us to have very highly probable, highly reliable, repeatable, and highly predictable series of lines that give us support and/or resistance levels, including what I have discovered as some of those lines are known as hesitation levels.
There are major lines and levels in each Fibonacci, the most important one is 0.618. And, basically, if you took a oh the rabbit counting exercise, which is a Fibonacci number ratio, and you add the first two numbers up on Fibonacci, it’s 0 and 1, 0 + 1 is 1. Then you go to the next two numbers, 1+1 is 2, 2+1 is 3, 3+2 is 5, 5 + 3 is 8, 8 and 5 is 13. And you keep going, by the time you get 10 or 12 numbers deep, when you divide those two numbers into each other, it gives you 0.618….what does that mean? Well, you continue to divide every number after that and they get closer to a pure 618. They never quite get there, but you get closer and closer and closer to that number. One of them is 0.61822222… 25 twos long or something like that. You know, you get the, uh, scientific error message that it’s too big of a number.
But how does it play a role? It plays a role that it helps us to identify support resistance and areas that stocks tend to hesitate with high probability, highest probability in my opinion over any other technical indicator. Now, you may find something that you like, take a moving average. I love moving averages, but it is secondary to me because they are historical. They’re working off the last eight or 10 days or, ten five-minute candles, right? For me, eight five-minute candles. They’re historical. Fibonacci are, to me, the most accurate of all technical indicators. It’s a leading indicator, not a lagging indicator, at least the way that I teach people to utilize it.
So is Fibonacci a standalone indicator? I get that question all the time and the answer is, it can be, but I do like to have some backup or some secondary, possibly even tertiary indicators behind me. So for me, I use Wilder’s average true range, as an example, and volume to help me pick a candidate to say, should I even look at this one, forget about the pattern, should it even be on my list? Once I have it on my list, now I draw the fibs and I use moving averages to help me confirm yay or nay, should I, should I not be taking a trade off of this position based on bias, based on confluences – these are my trading system or parts of my personal trading system. You will use other indicators and that’s okay. Brandon Wendell who’s a phenomenal trainer, is an RSI guy. He uses RSI regularly. He teaches Fibonacci as well. He uses it differently than the way that I do, but he gets the job done using fibs just as I do. All right.
So now there are multiple Fibonacci patterns. My favorite pattern is an h-pattern. Now, the best way I can describe the h pattern to you is, I want you to think of if, you send your five-year old to kindergarten. First couple of days, they start drawing out the alphabet and you may have even helped them before getting into school hopefully, and they draw a letter out. And the letter I’m thinking of is a lowercased h. Now, if you think of the structure of the H right, you’ve got three lines to drawing it out, right? The top line, the bottom line, and a dotted line in the middle. So what do they do? They draw the line down, but usually it’s kind of jagged or angled, and then they come up and they don’t travel straight back up that leg. They kind of go off and veer out to the right and then lean over it. So it’s a very ugly looking h compared to what it’s supposed to look like. And I know, I know, I know you’re a proud Papa or Mama, that’s the prettiest h in a world, ’cause your kid or grandbaby did it. I understand that. But when you look at the way the h, the actual lowercase H is drawn, that’s not the pattern we’re looking for. I am looking for a line that’s kind of angled down from top to bottom, and then we never retraced back up the same leg again. We kind of go out to the right and roll over. That’s the H pattern. That happens at the 0.5 or 0.618 Fibonacci level, right? That age pattern is one of the most powerful trades. I taught that as a standalone trade for almost two decades. That was the only Fib pattern that I looked at. Why? Because man, I was crushing it with that. But with years of practice, I have found other patterns; they take more time, there’s a different series of rules. But my favorite is my first is the H pattern. I love that H lowercase, you may look at it and say, well, that’s an ugly letter to me. It’s the prettiest letter in the alphabet that lowercase H.
So you’re saying Fibonacci trading really is a thing? Yes! You know, for those of you that are skeptical and I’ve had another trader do this, where they said, “if you draw enough lines on the screen, sooner or later, you’re going to hit one of them.” And you know what, you’re right. Absolutely. You are right. Sure. But here’s the thing. We talking about a .618, the most powerful number in Fibonacci. And I explained the why with that, of dividing those five numbers sequences together to come up with that level. If you take that number, that 618, and you get to move to that, you know, top to bottom, and then you retrace back to that .618, and you fail at that level, right? That pattern, that set up, that structure has an extremely high probability. Each Fib line, I look at it as a standard deviation. You get, and y’all can give me the exact number for standard deviation. You can put that down in the comment section below, but it’s 94 or 96 point something percent. I never remember it. It’s just, I got enough of it. I’m close enough. But about 94% of all data points fall within those first two line moves. So, you’ll see that move fall down. I take that trade. Boom, boom, boom. I got quick profit on there and I’m good to go. Well, I was talking about that .618 and the person kind of leans back and goes, you know, Rob, I’ve heard something about this. He goes a trader that I know told me that if you watch, when you get a 50% retracement of a move, just let it go a little bit more, and that’s where it tends to stop. And I went, “oh, you mean the .618?” And he goes, “oh my goodness! I never looked at it that way. I never thought that things were a valid way to trade, but I understand your reasoning and your “why” behind it.” So, you know, do they work? Without a doubt, they work, right? So yes, they really are a thing right now.
Every trader needs to spend some time looking at a Fibonacci chart to learn how to trade it properly. The only – listen, the only way you can do this is sit down and draw. I give homework to students all the time, and that says every day, go to the S and P 500, start with the first symbol in that S and P 500 alphabetically and draw Fibonacci chart on 10 of them every day, your first 2030 are gonna stink. You’re nowhere going to be, we’re supposed to be. But all of a sudden, you’re going to start honing in that skill. You’re going to start picking it up. You get to number 15 and go, “wow,” you get to number 200, man am rocking. You gets another number 500, you go, that’s it. I got nothing left to do. Man, jump on the Dow. Pick up that 30, jump on the NASDAQ, pick up that hundred, go to the Russell 2000! See where I’m going? There’s plenty of stocks to draw Fibs on, but you need to look at Fionacci Fibonacci chart again and again, and again, draw your lines, learn how to be profitable by learning how to be successful with the way that you draw the lines and interpret the lines.
So for me personally, for Rob, I am a technical trader by heart. Period, the end, that’s just what it comes down to. I am a technical trader. I don’t look at fundamentals, I don’t look at the news per se. I see what news is moving stocks in the morning earnings – I do like earnings. But I’m not looking at, we got a new product, we got this coming up that we’re going to start working with this…I don’t look at any of that stuff. News comes out, I’ll trade the news at hand, right. But I’m a technical trader at heart. So for me, having a technical system is the only way to do this properly. What is the technical system? For me utilizing proper indicators to identify a candidate, in my scenario, it’s price – the price of the stock on make sure it’s at least a certain price, and for some that you may put a cap on that. “Yeah. I don’t want to do Amazon. Whoa, three plus thousand dollars! Nah, I’m good.” Give me, give me a lower number, maybe a hundred or 200, whatever your number is. So you’ve got price. Volume, I want at least a million shares while this average true range. I’m looking for a certain amount of movement every single day, based on the strategy that I’m trading. From there. I look at my fibs and I use my Fibonacci’s to help me say, “yup. This one goes on my list now.” And then I use moving averages as more of a secondary indicator, where Fibonacci’s are primary, I use moving averages as a secondary indicator, looking for confluence is when a Fib line and moving average line kind of intersect or get very close to each other and give us a confluence. That is very powerful to me. So technical? Yes. But pattern and system driven? Absolutely.
Now one of the best ways to learn technical analysis using Fibs is to just draw the lines, just do it. Nike said it, baby. Just do it. Draw the lines. The only way you’re going to learn this is if you start to draw it out, right. Do it again and again and again and again, and again, you can be successful with it, but not on your first attempt or your first 10. You’ve got to really learn the nuances, the intricacies of how to utilize this indicator. It’s an indicator that I have been using since I learned in 1997, my mentor taught it to me. He passed away before I learned all of it from him. And I struggled for years to perfect it, which is why that h pattern is all I traded. And then I stepped into the role of, you know, higher-level coach where I wasn’t just teaching people the basics and all of a sudden, I go, “wait a second. I see that pattern.” We have something called a Fibot. We have a zero breakout, an inverted zero line breakout, a Fibonacci channel, a Fibonacci triangle. And there are more advanced patterns like Gartley’s and so forth as well. But, you don’t need those very crazy designed, drawn-out patterns that take forever to recognize one. I find stuff to trade every day, my zero line breakout trade. I can find half a dozen candidates almost every day to trade. Just that one pattern that one set up.
So there you have it, ladies and gentlemen, I hope it helped, and I will see all of you at our next update. Take care for now. Bye.