ASIA PACIFIC’S PREEMINENT TRADING MAGAZINE™

MICA (P) 136/05/2008

ISSN 1793-2149

Volume 4 Issue 5www.tradersjournal.com

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TM

Global Gold Bull Market

Fibonacci Profit Objectives

Convergence and Divergence

The Money Management Exit

The 3 Essentials to Profitable

Trading

Fibonacci Profit Objectives

JOE DINAPOLI

22 MAY 2008 / VOL. 4 ISSUE 5

TECHNICAL ANALYSIS

Joe DiNapoli discusses using Fibonacci analysis to establish

logical profit objective points. His use of DiNapoli Levels is a simple,

effective way to use Fibonacci analysis to profit in any markets

Fibonacci Profit Objectives

Technical analysis techniques range from the opaque to the incomprehensible. They can be totally useless or amazingly accurate. Almost every trader who has

been involved in the market for any length of time, has heard that Fibonacci numbers and Fibonacci ratios can be applied to the markets… But, few know how to use them effectively.

Like technical analysis itself, Fibonacci techniques vary from brain-twisting impracticality to the amazingly straightforward and stunningly effective. Many of the more complicated forms of Fibonacci analysis are designed more to keep the trader tethered to the advocate of such techniques rather than producing effective results. This article will dispense with the mystery on one aspect of ad-vanced Fibonacci techniques (Profit Objectives) and set you on a path to an understanding that should produce strong and replaceable returns for your portfolio.

The market need not be the mysterious place it once was if Fibonacci analysis is understood in its most applicable form…DiNapoli Levels. It does not require complicated forms of wave analysis or convoluted Gann related timing techniques. It does require thorough and repeated appli-cation of a series of deceptively simple rules.

Brain Twisting Fibonacci Techiques

Figure 1

The Fibonacci number series (1, 2, 3, 5, 8, 13, 21, etc.) and the resulting Fibonacci ratios (0.146, 0.382, 0.5, 0.618, 1.0, 1.382, 1.5, 1.618, 2.618, etc.) are the heart of Fibon-acci analysis. My technique uses a specific form of Fibon-acci expansion analysis to calculate ‘Logical Profit Objec-tives.’ It uses only three ratios: 0.618, 1.0 and 1.618. The proper use of these three ratios allows me to ignore most of the other ratios, as well as the entire number series from which those ratios are derived.

23MAY 2008 / VOL. 4 ISSUE 5

TECHNICAL ANALYSIS

Objective Point Equations

Figure 4 a

I use three simple equations to establish logical profit objec-tives, where A, B and C (Figure l) are specific points in a market move. The first objective is the ‘contracted objec-tive point’ (COP). It utilizes the Fibonacci ratio 0.618:

COP = O.618 (B – A) + C

The second objective is the ‘objective point’ (OP), which uses the Fibonacci ratio 1.0:

OP = B – A + C

The third objective is the ‘expanded objective point’ (XOP), which uses the Fibonacci ratio 1.618.

XOP = 1.618 (B – A) + C

This simple set of equations has allowed me to calculate major turning points in a variety of markets – days, weeks and sometimes months in advance of the actual turn.

In Figure 4, Chart A, point A marks the beginning of an up move, point B marks the highest high of that move and point C marks the lowest low following point B.

In Figure 1 Chart B, point A marks the beginning of a down move, point B marks the lowest low of that move and point C marks the highest high following point B.

Once all three points have been located on a bar chart, their respective values can be entered into the equations and all of the three profit objectives can be quickly deter-mined.

GoldIn 2002, I was invited to do a workshop series in South Africa. The main topic of my presentation had to do with Forex markets but as should be obvious there was a sub-stantial interest in the future of the gold market. In each of the presentations I gave, as well as in television inter-views, I showed the following chart.

Fibonacci Numbers

Figure 2

Popular Fibonacci Ratios

Figure 3

Logical Profit ObjectivesDiNapoli Levels, Logical Profit Objectives using the expansion rations .618, 1.0, and 1.618

Figure 4

24 MAY 2008 / VOL. 4 ISSUE 5

TECHNICAL ANALYSIS

Yearly Gold Expansions

Figure 5

Approximately 7 years later, the gold market hit 730 and from there had a substantial retracement

D-levels

Figure 6

25MAY 2008 / VOL. 4 ISSUE 5

TECHNICAL ANALYSIS

Most of you know the next stopping point. As expected $1030 followed by an as of this writing, stunningly fast 150-dollar per ounce retracement.

If you are wondering whether you will need to wait sev-en or eight years for all of these objectives to be realized, the answer is happily, ‘no’ it depends on the timeframe of the chart being analyzed. If you are working from a five-minute chart, you may be looking a half an hour or so into the future. On a daily chart, you could be several days to a week or so ahead of market action. The good news is that this works on all timeframes and on all liquid markets.

Trading strategy The strategy of DiNapoli Level expansion analysis is to lo-cate points A, B and C on a price chart, determine the values of each point and enter the values into the objective point equa-tions, producing three different profit objectives at varying dis-tances from point C.

Once the three profit objectives have been located, your strategy for taking profits can include any combination of the objective points. You might choose to take all of your profits at one objec-tive point. Or, if you are holding a multiple-contract position, you could peel off contracts at each objective point. As you work with the concept, you will likely develop other workable strate-gies.

Three targets, or logical profit objectives, can be calculated from any ABC market swing, whether the thrust is up or down. You always use intraday highs and lows. Forget the complica-tion of two deviation units from the high/low average divided by the distance to the sun on every other full moon. Just keep the analysis simple, use the high and the low!

There is a variety of software available from our web site that effectively performs these calcu-lations and displays the points of interest clearly. I designed all

of the software to meet the specifications of a demanding trader. The simplest of these programs is called FibNodes. It can perform these calculations and a variety of others in a particularly effective format. Presenting DiNapoli levels in an effective format is extremely important and not typi-cally available in generic software.

Profit objectives can also be located on a price chart with an architectural tool called a proportional divider or preci-sion ratio compass.

The Proportional Divider, Effective, Inexpensive, and AccurateThe tool graphically locates DiNapoli Level Retracements and Profit Objectives

Figure 7

26 MAY 2008 / VOL. 4 ISSUE 5

TECHNICAL ANALYSIS

Measure Vertical Distance Only

Figure 8

Position The Divider Against C

Figure 9

27MAY 2008 / VOL. 4 ISSUE 5

TECHNICAL ANALYSIS

The resulting numbers are extended from point C in the same direction as wave AB.

In Fibonacci expansion analysis, negative numbers are not recognized. It should also be noted also that analysis does not use time to locate profit objectives.

It is possible for the move that occurs after the wave ABC to reach all three objective points after experiencing a reaction at the previous profit objective. It is also possible that the first objective could be the end of the move.

Note that, when using logical profit objectives, significant selling will be manifest at all three objec-tive points in an up move, while buying will occur in a down move. You cannot be sure of the extent of the resulting reaction, only that the activity will occur. There’s nothing wrong with exiting partial positions at each objective as it is met.

These objectives are particularly useful in panic markets when all other types of analysis seem to fail. Notice how the support held at the COP in the recent GE earnings miss as the stock was down dou-ble digits percentage wise. This kind of dramatic decline is almost unheard of in this bell weather, well-run company… and it held right on the COP. This is no more an accident than $1030 on gold.

GE Held The COP During It’s Double Digit Decline

Figure 10

If you have the knowledge and high quality software, you can even apply these techniques to ultra-fast intraday moves caused by news announcements. The following chart shows how the XOP was hit on the 30-minute USD/JPY after a Federal Reserve announcement. Take note of the right side of the chart. The methods are equally effective on one-minute and three-minute charts but do not even think about it without top-notch software and ample experience.

28 MAY 2008 / VOL. 4 ISSUE 5

TECHNICAL ANALYSIS

Discount & Fed Funds Rate Dropped .5%

Figure 11

An important rule to observe when using expansion analy-sis is to use objective points primarily for exiting estab-lished positions. That way, you are always trading with the trend of wave AB and not against it. A strategy of pur-chasing options against objective points is also acceptable, but more risky than flowing with the trend. After exiting a position, I usually wait for outright entry signals before taking new positions.

Whether you use COP, OP or XOP as a profit objective, it is a judgment call that takes into consideration other tools in your technical arsenal. Examples would be overbought/oversold oscillators, strength and thrust of the move indi-cators, previous length of base, trend in the next higher time frame and volatility.

If you trade futures or commodities, continuous contracts must never be price adjusted for high open interest or for any other reason. Take the contract to expiration for the best results before rolling. Never use log scales and despite what you may have heard in chat rooms or by way of cer-tain wave theory techniques…always extend the expanded wave from point C not point B.

Joe DiNapoli is a veteran trader with over 40 years of solid market trading experience. He is also a dogged and thorough researcher, an internationally recognized lecturer, and a widely acclaimed author. Joe, a registered C.T.A. for over 15 years, has taught his techniques in the major financial capitals of Europe, Asia, Russia, the Middle East and South Africa as well as in the United States. His articles have appeared in a wide variety of technical publications worldwide.

Joe’s exhaustive investigations into Displaced Moving Averages, his creation of the proprietary “Oscillator Predictor” and in particular, his practical and unique method of applying Fibonacci ratios to the price axis, makes him one of today’s most sought after experts.

He was a contributing author to High Performance Futures Trading, Power Lessons From The Masters, selected 1990 book of the year by Super Trader’s Almanac. He has also authored the “Fibonacci Money Management and Trend Analysis In Home Trading Course” which has been lauded by professional and novice traders alike. His most significant work to-date is the book Trading with DiNapoli Levels, which has become the industry standard for students of Fibonacci trading techniques. Joe can be contacted via his website : www._btrader.com or email : CISinc@_btrader.com

More information on these and other practical Advanced Fibonacci techniques, DiNapoli Levels, can be found at www.fibtrader.com.

29MAY 2008 / VOL. 4 ISSUE 5

TECHNICAL ANALYSIS