Trading What I See

Some of the best trading experience you can get is by watching an expert trader at work, and you can have that opportunity with Dr. Brett Steenbarger on Wednesday morning. Every so often he will use his blog to analyze the market in real time, including any trades he makes.

I’ve gained a lot of insight watching live action by traders such as Linda Raschke, Don Miller, Teresa Lo, and of course Brett Steenbarger. After he had a “Morning” on Halloween, I e-mailed him saying we had taken identical trades (both entry and exit) for entirely different reasons.

Although Brett and I have very different trading styles, I read his blog daily. And I completely agree with his comment from last week:

Teaching a person what to look for in a market is quite different from illustrating its recognition in real time. Many chart patterns, for instance, are far more recognizable in retrospect than during their formation. Live training is key to every performance field, from athletics to the elite military. Why should trading be any different?

Take a look over his shoulder Wednesday morning.

Have you ever noticed that when you start thinking about something that you haven’t seen for a while, it will suddenly appear? Last Friday I received an e-mail asking if I knew about the Bull and Bear Crown trading patterns (similar to small head and shoulders.) I said I thought I had heard of it, but I might be confusing it with the Triple Crown pattern, which is different.

Today, with a boring market, I was spending more time looking at longer charts, and what should appear but the Triple Crown. I usually have most of the Fibonacci retracements and extensions drawn on my 15 minute chart, so it’s just a matter of watching price approach the various lines. Today at 11:30 (Pacific) a pullback dropped right into a Fibonacci cluster.

Fibonacci clusters are price areas where a number of Fibonacci relationships from different pivots appear in a relatively narrow band. The theory is a Fib cluster is more likely to be a turning point than a single Fibonacci measurement. Point “C” on the chart was a 62% retracement of the move from “A” to “B”. But it was also a 78% pullback from point “a” to point “b”. In addition (although not show to keep the chart readable) the move from “B” to “C” is a down-up-down move where the second drop is 162% of the first. That’s one nice Fibonacci cluster.

Now you don’t have to know this is a Triple Crown in order to trade it, because a good Fib cluster is always a setup. But since I had just looked at the pattern in Derrik Hobbs’ book Fibonacci for the Active Trader on Friday, it was hard to miss.

The pattern requires an overlapping pullback with a specific Fib setup. From the lowest bottom (”A”) price must come down to the range of a 50% to 62% retracement. And from point “a” the 78% retracement must fall between those two numbers. You can see this with the red smaller retracement falling inside the larger yellow retracement. Derrik calls this one of his favorite setups, and says:

It is a specific combination of these three Fibonacci retracement levels that identify potentially powerful reversal areas in any tradable market with liquidity.

He even gives you a first target - the 127% retracement of the “B” to “C” move. His actual trailing stop procedure doesn’t take profits here, but locks in half the profit and tries for more.

You might have trouble finding Fibonacci for the Active Trader unless they decide to re-publish it. Several months ago I saw it listed used on Amazon for about $2,000. (Not a misprint.) However if you hurry, it looks like Ebay has an auction going with the present bid just under $100. But as you can see, the Triple Crown can be traded without the book.

Watch for this and similar clusters. They may become one of your favorite setups.