Traders Dream by George Kiberd...a technique using Fibonacci, Bollinger bands and divergence

Traders Dream by George Kiberd text only

...a technique using Fibonacci, Bollinger bands and divergence

This document is from a trader and frequent poster on the MedianLine yahoo group. Join the group to see more of his charts and ideas.

Thanks George for this document and all your great posts. They have personally helped me develop my personal trading style by incorporating some of what you explain here... NQoos

There are 16 chart examples here on 5min, 13min, 60min, 100min and Weekly. Charts shown are setups on stocks and indexes. A true test of the validity of the method.

The basic concepts working here are to sell at the confluence of resistance found at major .62 Fibonacci levels and Bollinger Bands with divergence present. A three signal trade.

This is a large web page containing 16 charts. With a DSL connection it may take 1 minute to load.

If you have a 56k connect best to view this link instead with the text only and then can open each chart separately in a pop up window.

Got DSL click here. Got 56k click here or download the document here

dream1

Traders dream -- with my simple visual tools it does not get much better than this. I've left Fib and Gann off the screen; they were there to confirm all the way up. Bottom line: subtle 3 little Indians.... first pullback... notice how 3/10 moving average oscillator (MAO) indicator returns to 0 but price barely moves... that is always sign of strength...2^nd pullback ... hidden divergence at the 21 bar MA. We're going higher... 3rd pullback ... another hidden divergence ... higher still ... finally out and short at top on a clean divergence that was confirmed by the charts on all my traders. Yes, I did exit on the divergence midday on 2/11, but I was back at it as hidden divergence set up. Hope this helps.

dream2 dream3 dream4 dream5

I came into today looking to short this. For a Fib/band/ divergence trader, trade location does not get better than this. When I wrote last week about taking same trade over and over, this is exactly what I'm looking for. Enclosed is a larger chart to give greater context. Remember this stuff is simple so I hope no one feels I am insulting their intelligence. The band of three lines across the price chart represents the Fib retraces of .382, .5, and .618. and when I am looking for market to turn in the time frame I am trading, I am looking for Fib and divergence after a move to a band or moving average Thus, on the BRCD and SEBL charts, I was showing one trade on each.

Three important elements warrant emphasis:

1. TIME IS THE KEY. WHEN ENOUGH TIME HAS PASSED, PRICE MUST LEAD.

2. 2. THE MEASURED MOVE.

3. 3. MOST TRADERS WOULD BE BEST SERVED BY DRAWING A LINE ACROSS THE CHART AND BUYING ABOVE AND SELLING BELOW.

TIME: As traders we need to be aware of different elements of time. We each have our own internal cycles or clocks that we bring to each trade. I have tried this explanation on kids and adults recently and have gotten good response so here goes... we are going shopping for bananas...lets say you wake up one morning and you want a nice banana. So, you go to the banana counter and what do you see. Remember you want that banana today. To your left are the green ones; not enough time has passed in relation to your internal time. You know without thinking that at some future time, when enough time has passed, they will be ready -- but not now. To your right you see the black old ones. Too much time has passed in relation to your time. So, you look to the beautiful bunches in the middle and to the best of your ability you choose the best. You can do no more in the context of the coming together of your time and the bananas time (enough time has passed both on your clock and the stocks clock). Now you must peel the banana (take the trade) if the inside is good you eat it and are happy. (price leads time). If the insides are rotten you toss it and do not get hung up on the failure of your choice despite your doing your best.

A few more thoughts on time and then I’ll get to the heart of the matter. Everything I use to tell that enough time has passed is on the charts I post. Once I am done showing Fib band divergence, the time element is so intertwined with the setup that an exact knowledge is not needed. One other thought on time. This comes from a number of traders asking how can I watch so many stocks. This comes from both Tim's and Joed's urging us to look at longer time frames. I used to trade just the QQQ and SPY on a short time frame, probably like a lot of traders do on the futures. It’s kind of like swatting a golf ball out of the air with a pencil as it flies by. Now, I spend a lot of time looking at 100 minute charts watching the trades setup at a comparatively glacial speed. That’s kind of like swatting beach balls out of the air with a tennis racquet. Once you understand my stuff, you will see that at market turns wave upon wave of stock will be giving you the signal and you brain will register ''oh. the market is turning.”

dream6 dream7 dream8

I wanted a way to trade that was so simple that a glance at my screen would give me the trade and that was so simple to explain that after being given a few rules even a child could pick out the trades on the screen. I wanted a way to deal with the fear that haunts all traders -- not doing our best. All I can say is that for me searching out and taking these same trades over and over is doing my best. Remember it all takes place in the context of time is the key.

FIBONACCI:

With any stock I am trading, I am aware of the major Fib retraces from the last major swing high and low. On any chart greater than 60 minutes (100, daily, weekly), I give equal weight to .382, .5 and .618. Other than that, I let my Fib tool roam the charts looking for .618 retraces. This is an advantage of looking at many stocks. At the turns you have more .618 retraces than you know what to do with. If I miss the turn or I want to push a trend, I look for .618 retraces of the smaller swings.1.00 is a key Fib number too in the sense that I am looking to trade double tops or bottoms. This works in all time frames. Demanding that this be accompanied by band and divergence before you'll trade is what makes the set up. The SPY attachments with this post show how on different time frames the message was the same on Thurs. At the Fib level and upper bands with divergence in every time frame. The next couple of post will have the .618 and the “push trend.” On the 60 min. SPY chart, the top line is the 1/4 high the bottom line the 2/7 low and the three line cluster shows the .382. 5 and .618 retraces of that swing. The lone oscillator on the 60 min. chart is the 3/10 MAO as is the middle on the 13 min. and 5 min. charts. It is my key to divergence, as I will cover shortly. I'm just starting by showing Fib work.

dream9 dream10

The goal of these posts is to show a specific trade setup --Fib/band/divergence -- and then to show the language of divergence. I have a choice to make. If I show the detail of the turn, then I lose the clarity of the swing and the opposite is true. Here, I am showing the swing and not the clarity of turn. Starting from the swing high on 2/4 (top blue line) price moves down to swing low on 2/5 (bottom blue line). When price starts to retrace, I set my .618 retrace level (middle blue line) and leave it on my screen. When price reaches that level, I am looking to trade if and only if a divergence sets up on 3/10 MAO, which it did. Others have asked what to do if price exceeds .618. I use a reasonable stop, but otherwise I stay with the trade. Having divergence show up at same time as a .618 retracement is powerful signal.

dream11

Let’s say you missed that last turn. Here is how to get on board using Fib/band/divergence. From the swing high on 2/6 (top blue line to swing low (bottom blue line) later that day I look for a swing back to .618 (middle blue line).

dream12

Let’s say you missed the top and missed the first retrace. The top 2/6 to the bottom 2/7 price retraces to the .618 level where hidden divergence sets up. Notice too that this retrace and previous ended in area of middle band. I hope some light bulbs are going on by now. Essentially, you were given 3 opportunities to get short this swing using the exact same criteria Fib/band/divergence. Now is a good time to say this: one of traders’ great fears and I think leads to a lot of bad trades is the feeling of missing the trade. If you watch a small group of stocks in multiple time frame and wait for this trade you will be delighted to find that there is always a trade setting up that lets you get on board. If you miss one, another is about to happen. Simply sit at the screen, watch, and wait.

dream13

BANDS:

On all my charts, I have 3 bands. The upper and lower bands are 21 period Bollinger bands and the middle band is a simple 21 period moving average. Stare at the chart a moment. Feel familiar? Think of the upper and lower bands as the upper and lower MLH and think of the moving average as the Median Line. See how price interacts with the bands similar to interacting with Median Lines? Basically, I think of the bands as median lines that adjust constantly to market volatility. The key to understanding the movement is sitting right below in the form of the 3/10 moving average oscillator. Its language is simple and clear and combined with Fib and bands is an amazing thing.

dream14

DIVERGENCE (MOMENTUM):

My kids say they understand it better if I call it “momentum.” I use a 3/10 moving average oscillator, and much of my early understanding of this comes from Linda Raschke's work. As far as I know, she never made the leap to think of the bands as oscillating Median Lines and not once have I ever heard her tie Fib into her use of the 3/10. There are two kinds of divergence: regular and hidden. I am using the same chart of NVDA as before, and I put that big fat green line on the top to remind us that it is the .618 retrace of the swing so that is exactly where we want to see divergence. On the morning of 2/6, price pushes to new high and the 3/10 MAO pushes to new high. Price pulls back then later in day makes a new high, but the 3/10 does not make a new high. That is regular divergence. Note too that on the new high price can not reach the upper band. The message is the same as when price cannot reach upper MLH -- weakness. For a Fib/band/divergence trade, this is an ideal trade location. Price sells off, makes a weak rally then drops the next morning. When price starts to rally we calculate a .618 retrace, which is represented by the thin red line. That is where we want to see the 21 period SMA (think Median Line) and hidden or regular divergence appear. We get hidden divergence in this case. See how when price hits the red line, the 3/10 is higher than the previous peak but price is lower than the previous peak. That is hidden divergence. For a Fib/band/divergence trader this is ideal trade location.

dream15

There are two set ups with divergence and one favorite special case to cover before we push a trend with divergence. Longer term forum members know of my love of the three little Indians. There is no better example ever than the weekly chart of KMART. Here in Michigan, the home of KMART, last summer the papers were filled with articles about the rebirth of the company and how the stock was hitting multi-year highs. Look what chart was saying -- here comes the waterfall. The three little Indians occurs when price makes three pushes to a top with less momentum on second and third push. How did we know we were going to get that third push after divergence on the second push? Hidden divergence showed up when price returned to the MA! Remember, hidden divergence in an up trend is a sign of strength, in a downtrend a sign of weakness. There are two cases where divergence may throw you. After a bottom and the initial up thrust the first retrace may generate a lower momentum reading than at the bottom -- just think hidden divergence. In a trending move you often get a two wave correction at which momentum makes a new low, so just be on the lookout for this.

dream16

PUSHING THE TREND:

Here is the language of momentum in all its glory. Look at the bottom on 2/8 -- my buddies the three little Indians are there. Price pushes up into next morning where price stalls and some minor divergences set up. The 3/10 MAO returns to the 0 line, but price barely budges. RULE: whenever the 3/10 return to 0 line but price does not return to the MA, that is a sign of trend strength. Price is going higher. Oh, I forgot to mention; see that big fat green line at top? From the time the bottom is in, we have that sitting up there -- it’s the .618 retrace. At midday a divergence sets up and price returns to the MA where hidden divergence sets up to tell us we're going higher. Price pulls back on the morning of 2/12 with another hidden divergence to tell us we're going higher. Around midday, price makes a slight divergence. Price makes three attempts to return to the MA, and the 3/10 can’t get back to 0. Price is going higher. Late on 2/12, another divergence appears, but on the pull back another hidden divergence! Where does the last pop stop? The next morning with a clear divergence right at the .618 level. Fib/band/divergence.