TraderTalk: Carolyn Boroden on How To Make Money With Fibonacci Price Clusters

This is an edited transcript of the live TraderTalk held for TM members by Carolyn Boroden on Thursday, August 29, 2002.

Brice Wightman: Good afternoon and welcome to TraderTalk. Click here for the chart link. Today we have a special guest. She began her career on the Chicago Merc. She's a CTA, and her time and price analyses are used by many hedge funds. She resides in Arizona, but today she's coming to you from Chicago. It's my pleasure to introduce Carolyn Boroden...

Carolyn Boroden: Hi there. Today I want to focus on the three main "setups" I use. They are all Fibonacci clusters. For that, you need to connect to my trading manual. This is the first link on the other webpage you are viewing. For those who are not familiar with my work, my focus is on the clustering of Fibonacci time and price relationships. During the day for my chatroom traders, I am mostly focusing on the three types of setups I am going to show you now. You have the right page selected if you see Ideal Trades type 1. This is really my highest probability trade setup.

Type 1 Trades

There are three elements to this trade: First, it is in the direction of the immediate trend...as judged by a five-minute or two-minute chart. The question becomes is this market making higher highs and lows on this chart, or lower lows and highs. In the first chart you are looking at a five-minute NDU chart.

The market made a lower low when it violated the 1698 level so then I started setting up the potential trade. I ran all possible retracements from the highs to lows for resistance. I ran any internal price extensions possible and also the projection of the prior corrective rally in this case. This gave me a price cluster of resistance from the 1703-1709 area. A cluster is the coincidence of at least three Fibonacci price relationships that come together within a relatively tight range.

In this case, a high was made directly in the cluster at 1704. A healthy decline followed to 1653. The initial risk on the trade was just a few ticks above the EXTREME of the price cluster zone at 1709. After the market starts to go in your favor, you get to a breakeven stop ASAP and then trail it. This is a type 1 trade because it is in the direction of the immediate trend which was down at that point, it was a CLUSTER, and it included the symmetry projection of at least one prior corrective rally. THESE show up ALL the time in trending markets.

The second example was also in ND futures. The market was making lower lows and highs. I had a cluster from 1514-18. A high was made just one tick above here...and a healthy reversal followed immediately.

Wightman: Carolyn will be taking your questions in about 20-25 minutes. Send your questions to : tradertalk@tradingmarkets.com. The chart page is: http://www.tradingmarkets.com/.site/stocks/commentary/twiwshop/08282002-27307.cfm and click on the Synchronicity link.

Boroden: Typically, my objective for this trade (my first objective) is the 1.272 extension of the prior swing. The next example on the page is a five-minute S&P. In this case, the market was making higher highs and lows, so I set up the pullback for a buy entry. I had at least three Fib price relationships with symmetry projections at the 1119.10 - 50 area. A low was made at 1119.30. If this trade did not play out, I should have been stopped out about 150 points below the 1119.10 level.

Type 2 Trades

The SECOND type of trade I set up is called type 2. It is still a price cluster zone, but typically on a higher time frame for this trade, you have to use a sell trigger. Why? Because the immediate trend will be against you at that time. You want that immediate trend to AGREE with what the larger time frame setup is telling you.

In this first example, I have a price cluster of resistance at the 1689-92 area in NDU on a 60-minute chart, but the market was up in our face at the time. I am NOT a fan of standing in front of the freight train, so I go down to my lower time frame charts and look for a trigger. A trigger could be taking out a prior swing low or high. It could be a moving average crossover. It can be a Haggerty 1,2,3 trigger. It can be a double top or bottom pattern that develops into the cluster.

So, look at the next chart. The trigger on the five-minute chart set up beautifully for us. We had a double top into the zone and the double top was confirmed by taking out the middle low at 1676. Trigger means take action. Sometimes you might not sell the breakdown, you might sell a pullback after the breakdown. It all depends on your style. Today I had a setup in the USZ bonds. I had key resistance at 24-28 (forgot the handle) and a double top formed on the five-minute chart. It confirmed, and I had a nice sale

Take a look at the next chart. It is the 15-minute NDM chart. You can see a price cluster at the 1344-47 area on the chart. This is where I temper my perfectionism. The high was made at 1342...this was 2 points short of the zone. That is within reason, and the guidelines for that are in my subscriber's guide, so I went down to a five-minute ND chart and saw a double top form at 42, which was triggered when 1335 was taken out. The initial decline was to the 1304 level.

Let's skip down a few charts to the 60-minute spu with the cluster at the 1232-1233.40 area. The market gapped up into this zone...of course, you are scared to short, so you take it down to a five-minute chart. Go to chart just below. The high was made at 1231.50, just 50 cents short of the zone we double topped...and then saw our sell trigger with a violation of the 1225 low.

Those are type 2 trades: they are clusters on a higher time frame that need to be triggered on a lower time frame to play it safe and keep it high probability. Please skip down to the type 3 trades -- a few charts below. The type 3 trade is a two-step pattern, or sometimes called GARTLEY pattern. Into a cluster zone of course.

Type 3 Trades

In the first example, the overall trend is down on this two-minute S&P chart. We start seeing a two-step pattern develop against that downtrend. The cluster came in at 1084.50-1086.90. The rally terminated at the low end of the zone at 1084.50. A healthy and immediate decline was seen from this high

Skip a chart. Go to NDM 15-minute with the "a b c" on it. I remember the day this trade happened...people in my chat room thought I was crazy. The market was falling rapidly...and looked awful on the two-minute chart, but I threw out the zone at 1783-1783 because of the pattern AND the cluster of price relationships.

Move on to the next chart. The low was made at 1786 and it turned on a dime. Of course these patterns don't ALWAYS work, but they do more often than not. You can go back to the chart page and review these examples and see if you can construct this same type of setup on your charts

Let's quit this section and go to recent examples back on that first web page. These charts are a day or two old. The examples are recent though. I think I wrote a column about the S&P time and price high. You can see this huge price cluster zone in the first chart on this page.

The zone was very wide. We also had timing that suggested a potential intermediate high: 8/19-8/23. For days I watched the shorter-term patterns as we moved into this time window...finally...we had a beautiful hit of time and price followed by reversal indications on the short-term charts.

This defined the high as pivotal. This high is still intact today...as long as it is, the market is still vulnerable to a decline. It has potential for a huge decline due to the pattern on the daily charts, but honestly, I just take it one day at a time after this. I deal with long-term, intermediate-term and some very short-term traders.

So you take these trades against the zones according to the time frame YOU are comfortable trading. Some people use options. Anyway, so far so good on that call. And every day I look at the charts and see what sets up for us

Let's flip to Chart 3.

ECZ is setting up now. I have an alert for a potential two-step correction in the currency unit: 9888-9901 stands out...IF the market gets there...and then shows me a trigger on a five-minute chart, I take the trade. If we just clear the zone or don't see a trigger even after a stall, I stay out. It is as simple as that.

The rest of the charts are just some recent examples. 

Wightman: Chart page: http://www.tradingmarkets.com/.site/stocks/commentary/twiwshop/08282002-27307.cfm and click on synchronicity link. (Open another browser to view both pages simultaneously.)

Boroden: I'm ready for questions now.

Wightman: OK.

Question: What software do I need?

Boroden: Thanks to the programmer at Qcharts, you can now do all the price relationship work on Qcharts with the latest version. The software I use is Dynamic Trader, but you can also do this work on Advanced GET. I'm not sure what other packages will work, but there may be others

Question: Any good books on Fib you recommend?

Boroden: Of course, my teacher Robert Miner wrote an excellent book "Dynamic Trading", but there are others, one by Fischer, at Traders Galleria and also "Geometry of Markets" by Brice Gilmore. Larry Pesavento has some nice ones also on tradingtutor.com.

Wightman: Here's that book: http://www.tradersgalleria.com/galleria.site/search/main/?full=1&id=5825

Question: Carolyn, if you could only trade 1 Fib level, would it be the .618?

Boroden: I would feel nekked with only one level, but YES, it would have to be .618 just because of the way it shows up in the universe.

Question: When looking for a reversal in a Fib zone, how do you filter out whipsaws? Do you use any other indicators that will help determine if a break to downside/upside is likely?

Boroden: Believe it or not, I don't really use other indicators. I have put up some oscillators on my charts at the request of my subscribers, but honestly don't use them -- just my rules for entry, etc.

Question: Do you use volume for confirmation of more valid Fib retracement/expansion levels?

Boroden: I don't look at volume personally on my charts, though I see how the market trades. If it trades like low volume, I am less likely to step up to the plate, but if it is a strong cluster, sometimes I will just place the bet against the zone anyway, as long as it fits my rules for a setup.

Question: Very often you use the term trigger. Can you explain the term?

Boroden: Trigger is something that tells you to take action against a zone. My favorites are on my site http://www.syncmt.com on the trades and triggers page. I use the violation of prior swing lows and highs. I like Haggerty 1,2,3s. Some people like moving averages. Anything that gives you a reversal indication, but the ones I use are on that web page, like my bond trade. I had a double top into Fib resistance. Then when it broke the middle low, THAT was my trigger. I sold.

Question: Carolyn, are there any considerations to deal with if one were to use equities with your concepts?

Boroden: I love working with individual stocks that have well-defined highs and lows. You have to have enough decent data to work with in a stock. Forget about those old penny stocks. It won't work, but MSFT, XLNX, etc., it works great. That is what Derrik is doing. I taught him one weekend in Arizona, and now he is my clone in stocks.

Question: Do you ever fade a Fib level, i.e., enter without a trigger?

Boroden: Yes, a type 1 trade does not require a trigger. If I feel comfortable with the way the market is trading...and there are no freight train bars in my face...I just take the cluster and place a stop above or below with type 1, and sometimes type 3 trades.

Question: How close do Fib prices have to be for you to define them as a cluster?

Boroden: In the S&P I like to see no more than a 2 point spread ideally. In the ND futures, usually 3-4 points or else it's much too wide. I still have to put out reports you guys...

Wightman: OK, we're out of time. If you're not using Fibonacci techniques in your own trading, you're missing many good trades. Carolyn has a fantastic video that explains everything in much more detail, and if you order it today, you'll get 6 MONTHS FREE of her Fibonacci service!!! Thank you very much for a great session, Carolyn.

Boroden: You're welcome. Goodnight all.

Wightman: If your question wasn't answered, please resubmit it to tradertalk@tradingmarkets.com. Carolyn will try and answer you, but please keep in mind she's quite busy. A trial of her service will also answer a lot of questions.

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