A Practical Approach To Trading Fibonacci

Kwong: One of the things that makes your analysis so very interesting both in your nightly trading service that you do with Carolyn Boroden and also your twice-a-week column is that the passion comes out of you as you write about these stocks and as you show us your analysis and allow us to get inside your head. I think in building a case for a particular stock, there's a natural tendency to form an opinion. That opinion kind of works its way through as you actually trade. It is a very, very challenging paradox that we all face as traders.

Hobbs: After college, I continued to trade and was offered a job at Sym Financial, as a financial advisor, you know, coming in to consult with people on estate planning, basically wealth management. My boss and I started talking and I was giving input on what I thought about the markets and getting a lot of things right. They were starting to listen to me a little more.

We started saying that it would make a lot more sense if we could consolidate all these assets into a pool -- in a fund. And that way, we're not trading multiple trades across a bunch of different investment accounts. We can just do it within the fund. So we created the Sym Select Growth fund. We launched it a year and a half ago or so. That's the story, and it's exciting, and it's still a lot of fun.

Kwong: So you guys launched that site after the bear market had already kicked in?

Hobbs: Exactly. (Laughs)

Kwong: Let's get to your trading strategy. Can you give me an overall description of your trading strategy? How do you ultimately wind up deciding: "I'm going to buy this stock. I'm going to short this stock."

Hobbs: Our growth fund approaches investing from a TFT strategy: Technicals, Fundamentals, Technicals. We're looking at the technicals of sectors and the broad market first and then we can find or identify strong trending, whether it's up or down, and we'll drill down into the fundamentals of that particular sector.

So if Semiconductors are doing really well and they're kicking in and getting a strong trend going, we'll dig on the fundamental side and jump into that and ask what's the strongest fundamental stock within that group? And then we'll cue it up and we'll log that in and then we'll enter on a technical entry and then we'll manage the position in technicals.

Again, it's TFT: Technicals, Fundamentals, Technicals. I really focus on the technical side -- my contribution to the fund is on the front end and the back end, looking at the sectors and the overall market and then also looking at entry and exiting of positions. My partner, the VP here, focuses on the fundamental side.

Kwong: I see. What kind of criteria do you use on the technical side for your entries and exits, money management?

Hobbs: Criteria to enter obviously -- we'll use a long position for example -- that's where we jump into the Fibonacci analysis. The way that I use -- and have been taught from Carolyn -- is just the whole support and resistance concept and the clustering of Fibonacci levels. So what I'm looking for is a strong trending position that pulls back, for example, as we're talking about a long here. It pulls back into a Fibonacci price support zone. And so at that point, when it hits that price support zone, I'm running my analysis. I'm looking at it and I then run time projections -- same kind of Fibonacci analysis, it's just on the time side of the market.

Kwong: Sure.

Hobbs: And then I will see where a potential low in price and low in time may occur. And if those two things square up and are basically telling the same story, then I'm just looking for an entry point from then. And my entries are very simple. Actually, from a daily chart I'll drill down into a 60-minute chart -- and I'm just looking, again on the long side, for a stock to create a swing high after we've hit our support level and then to actually trade up above that swing. And that's my entry. That's my confirmation that it's tested the price support level. And we're off and running.

Kwong: Can you give us an example?

Hobbs: Here's something that I mentioned on TradersWire yesterday -- Ingersoll Rand (IR | Quote | Chart | News | PowerRating). It had made a high back on March 20, and it traded pretty hard down over about four or five trading sessions, hit a key support zone and created an opportunity there. And so then I drilled down to a 60-minute chart and looked for a trigger and I got one today. In this market, it traded up a buck and a half today (April 4, 2002). And the entry was right around $47. So that's an example -- and my targets... I'm looking now for that stock to go up to at least test the highs. With Carolyn's work, we're always looking for a 1.272 extension as the target level.

Hobbs: So that's an example of somewhere we entered today in the stock in a pretty choppy market -- actually it trended pretty high most of the day.

Kwong: Are there any other patterns or technical indicators that you look at?

Hobbs: Yes, but Fibonacci is the cornerstone in my mind for this analysis. It summarizes the psychology of the market. The definition of Fibonacci analysis is natural movement toward certain retracements and projections and those kinds of things, so yeah, I use candlesticks to confirm positions every once in a while. If I can get a Doji pattern, for example, to form into one of my price support or resistance zones...you know, it's just a great confirmation, but really all I'm looking at is the Fibonacci side.

Kwong: How interesting. Tell me, what were some of the most valuable techniques that you learned from Carolyn Boroden? Techniques that you find indispensable and that you recommend other people learn?

Hobbs: From Carolyn's work? Boy! First of all, Keep It Simple. (Laughs) I love that. You know, we can get very complicated and complex, but bottom line, I think simplicity works in the market. And the other thing she taught was just the strength of a cluster zone. You know, when you can get a confluence of three or more Fibonacci levels, that creates a great trading opportunity.

The other thing that was very valuable was profit objectives. Looking at the previous swing and looking at a 1.272 extension if you get an entry opportunity. Because more times than not as I enter trades, a stock will trade to that 1.272 extension. I mean, it's just a natural attraction. That's been a great lesson.

And also incorporating time analysis. That's when we get the most powerful moves, when not only is price coming down into a price support zone, but when time can confirm it. When we see that there is a cycle in time coming to a potential low. Boy! That just intensifies or improves our odds of that move being even more powerful to the upside.

Kwong: I see. Now that you've had a while to apply these methodologies in your trading with the fund, what has the outcome been? Are you pretty happy with the results? Has it improved the profitability of the fund?

Hobbs: Sure. Our fund obviously comes with restrictions and those kinds of things -- the trading side represents less than 20% of the fund. So, it's an alpha to the fund. For the most part, we're a growth fund that's almost fully invested. So, in this market it has been difficult to obtain positive results, but by incorporating that 20% that we get to trade with, we've been very positive even in months of decline because we're picking off shorts, you know, trending stocks on the short side. And when the market moves to the upside, we're also picking off those.

Kwong: I see. So with this 20%, they give you the flexibility to go short as well?

Hobbs: Right. Short and long.

Kwong: That's interesting. How is the other 80% traded?

Hobbs: It's very fundamental based. But we try to enter and exit based on technicals and again, that's where I try to incorporate the Fibonacci analysis into that when we do have a fundamental position on the table. That has helped a lot as far as minimizing some of the risks or some of the downsides. You know, we've been able to exit positions when we violate a zone that's going to tell us that we're going into a deeper correction.

Kwong: I'm sure you're aware of Carolyn's background in futures trading. That's been her major emphasis. And here you come along, you trade stocks primarily. Are you aware of any differences between how she applies Fibonacci analysis to futures vs. what you do with stocks?

Hobbs: That was what I liked so much about it -- that there was no change. I was able to apply the exact same techniques from what she taught me -- from what she does with futures -- to stocks.

Kwong: I would think, though, that in some ways you may have an edge because some of these futures contracts that she's dealing with -- she doesn't have the history or that much of a data series to use as pivot points. Unless she's using the cash contacts.

Hobbs: A lot of times she'll go to the cash position, right.

Kwong: But you've got five years. You've got 10 years.

Hobbs: Oh yes, you're right. I'll look at a weekly chart. I'll apply the analysis to a weekly chart and those higher time frames are always more important decisions. So when I can apply it to a weekly and a daily and even drill down into intraday, I can get a really good picture of that stock.

Kwong: Any other specific trades you've made recently? Any interesting insights you might have gotten, given that the environment is pretty boring right now?

Hobbs: Sure. The first is on the ETF side. I've had a blast this week and actually in the last couple of weeks on the ETF side. In the reports we've been kicking out, BBH, the Biotech HOLDRs has been a phenomenal trading opportunity. We ran into key resistance at $130 a share a couple of weeks ago -- so we published that and it hit that resistance, and now it's trading down at the 114 range. But in the intermediate term, we were able to find a support zone on the way down to pick off about a 5 point move to the upside. And then we found resistance again with Fibonacci analysis and again, from last night's report, we said there was going to be resistance between 118 and 120. It hit it and immediately reversed and BBH traded down to the 114-115 range.

Kwong: That's probably what people in an ideal world would love to do: Sell the high, buy the low.

Hobbs: (Laughs) In a very boring market, that was an opportunity that was great. The other was in a boring market. Fibonacci analysis creates a great channel. I'll use the Semiconductor HOLDRs. We have very defined support and resistance and for the last three weeks have bounced up and down, hitting our support zones, our resistance zones and immediately reversing. There's been roughly four or five trades in the last three weeks for people who have been flexible enough to take advantage of it.

Kwong: And that one doesn't even tell if it's Fibonacci based. It's just based on standard support and resistance?

Hobbs: Actually it is based on the Fibonacci. There is a cluster zone on the support side and the resistance side that's been built on the daily chart and we have been able to take advantage of it. The support on that right now is like 4462-4504.

Kwong: I see.

Hobbs: And then the resistance is 4864-4497, and we've just bounced in there for a few good trades. So, there's trending ETFs out there. There's ones that are kind of in a trading range. But the Fibonacci analysis is picking them off, so it's pretty exciting.

Kwong: That's nice. Now, what about cases where you get stopped out. Will you ever re-enter if it pops back across your support or resistance level?

Hobbs: The general answer to that is "no." Basically my stop losses in most trades are below a support zone -- if I'm going long. So if I get stopped out, that zone immediately disappears.

Kwong: I see.

Hobbs: So it's gone. For me to re-enter, what happens is that stock or ETF has created a new low. Now I'm running new resistance zones, OK? So for me to actually consider getting back in, it would have to break a current resistance zone and get set up for me in the manner we talked about earlier. I typically wouldn't do that.

Now on intraday work, and you'll find this with Carolyn's service, there's enough movement in the futures that on a 15-minute or five-minute chart, you may exit a position and have the opportunity to re-enter, but it's because of the way that she set it up.

Kwong: What is your overall approach to money management? You kind of touched a little bit on stops. Let's talk about where you set your initial stop, how you trail your stop, target objectives that you have and any other kinds of considerations you might have if something really crazy happens.

Hobbs: Sure. I look at money management obviously from the standpoint of position size. I look at it from my stop loss and also on the profit side: How do I exit for profit? On the position size, I'm typically trading no more than 2% of my account value. That's one of my first money management techniques. I know there are quite a few people that say 1%, but I focus on 2%. And as far as stop losses, as I said earlier, I am typically finding trades where I can put my stop below or above the price support and resistance clusters, so that I can allow the price to move and to act against that zone without getting involved in it.

Kwong: Are there cases where you have an ideal Fibonacci setup but the entry point is too far from the stop-zone -- and you wind up passing on the trade?

Hobbs: Not necessarily. What I'll do then in those situations is if my swing point to enter is pretty far away, what I'll do then is I'll put my stop below -- in the case of a long position -- that low made before I entered on the swing. So, it's a little tighter move, but it's assuming, "OK, it tested my Fibonacci zone. And it shouldn't come back below this pivot point." So I will use that as a technique. I typically try to risk no more than 10% on any one trade. So that will kind of guide my decision: Do I go under the support or resistance zone or do I actually move it to the pivot point? That's the initial process I'm going through when I put my stop loss in place.

Kwong: I see. And once you've got a position going and it's moving in your favor, how do you trail your stop?

Hobbs: I am typically looking for -- in a long position -- there will be a swing down any time we enter a long position. Typically, in the way that I manage, I'm looking for a 50% retracement of that swing down. Then I take half of my position off the table. Then I move my stop up to breakeven. Then my focus is on that 1.272 extension. I'm looking to hit that. And as the market trades up and it hits that, I will take half of my position off at that point, half of what's left. And then what I do is -- sometimes it's in a runway market and that's what I want to focus on. And all I do if it's in a runaway market, I continue to trail my stops up to the previous swing point, the previous pivot point, so that I allow the stock to run and maybe catch a windfall.

Kwong: Do you have an example of that scenario?

Hobbs: Yeah. Recently, we did a Procter and Gamble (PG | Quote | Chart | News | PowerRating) trade. That was one of those situations where I didn't have a lot of opportunity to move my stops because it actually ran right up to my 1.272 extension right away. But that was one of those scenarios where it hit the zone and started moving up and I was able to trail. I went up and I took a position off at 50% and then let the rest of it go and took some off at 1.272 and I still have a position in it. March 11 is the day it made the low and then triggered. I entered March 12.

Kwong: Then the 1.272 zone -- that was around what price level?

Hobbs: That was around $89-$90 a share.

Kwong: OK, so you're taking 50% off the table at that point and from there, you're still in it as of today?

Kwong: We're about out of time. Before we close, could you please tell us what you consider to be the most critical factor in your success as a trader?

Hobbs: You're welcome, Eddie.