Trading using DiNapoli levels
Analyzing corrections and Fibonacci expansions is a necessary foundation in creating effective analytical trading systems for practical application in financial markets. Using the techniques of working with Fibonacci levels, you can get significant benefits from combining traditional approaches to trading (such as graphical analysis, computer analysis, etc.), as well as eliminate subjectivity in determining trading signals. The most simple and interesting use of Fibonacci ratios is in calculating the level of a pullback or bounce.
Unique method Joe DiNapoliDiNapoli's method, based on applying Fibonacci ratios to the price axis, make him one of the most popular experts of our time. DiNapoli has used his method to make incredibly accurate market predictions over and over again for stock market indices and interest rate futures. In our article, we will try to give a brief summary of his trading system.
Joe Dinapoli in his book "Trading Using Dinapoli Levels" on the practical application of Fibonacci concepts in the market, writes:
"You can observe the curious evolution of Fibonacci expansions in musical pieces, crystal formations, and even in the growth of rabbit populations. Fibonacci ratios are found in abundance everywhere, whether it is the DNA helix, a particular honeycomb design in a bee hive, or the inspiringly grandiose pyramid at Giza. The human body itself is an example of Fibonacci ratios... It cannot be denied that Fibonacci ratios and the numbers that generate them are inherent in all matter. Therefore, all aggregate human activity will, in one way or another, follow these principles. This is especially obvious for markets, since they are characterized by the strongest human emotions: greed and fear."
So, let's focus on the main aspects of Joe Dinapoli's trading method.
Trend Analysis. Displaced Moving Averages (DMA)
Joe Dinapoli remarked that moving average advance in time offers the trader significant advantages:
1- It lets you know what the projected Trend point or price expression of the Trend is in the future time ahead by Nth number of periods.
2. By using the "proper" number of periods to calculate the moving average and the "proper" offset scale, the DMA is able to reduce losses and smooth out the behavior exhibited by the market.
3. Some DMAs are extremely useful in identifying patterns (shapes).
Three DMA options:
? 3-period simple moving average from closing prices shifted forward by three periods (3×3) - DMA for short-term performance, effective in fast moving markets.
? A 7-period simple moving average from closing prices shifted forward five periods (7×5) - DMA on a longer-term basis.
? A 25-period simple moving average of the closing prices shifted forward five periods (25×5) is the long-term DMA.
How do we define Trend?
If the close is above your selected offset moving average, the Trend is upward. If the close is below it, the Trend is downward.
What if the price is above it now, mid-day, and yesterday's close was below it? In this case, the Confirmed Trend is pointing downward and the Unconfirmed Trend is pointing upward.
What if the price at the close of the exchange is below 3×3 but above 25×5? So the short term Trend is confirmed down and the long term Trend is confirmed up.
Trend Analysis. MACD/Stochastic combination
- If the fast line crosses the slow line from below, we have buy signal.
– Sell signal appears when the fast line crosses the slow line from above.
Use the signals Stochastic indicator (8, 3, 3) in the traditional way (crossing the fast line with the slow line and filtering it with MACD signals (9, 19, 9)) to buy or sell. In other words, Stochastic and MACD must both indicate buy or both indicate sell before a confirmed uptrend or downtrend signal occurs.
Trend Analysis. Intent Indicators
Indicators of intent - is a group of indicators, each of which helps us determine where the Trend may be heading. Intent can cancel a Trend. As a rule, Intent signals are pattern signals.
Within the framework of consideration of "Intention Indicators" we will single out the following signals: reversal and trend continuation figures, candlestick signals as Intention signals, unique patterns described by DiNapoli in his book.
Direction overrides Trend.
Fibonacci retracement analysis
Price movement range
Market Swing (Market Swing) - is a trader-defined market move, going from a "significant" market low or high that occurred sometime in the past to the most recent high or low. A market swing may be referred to as a wave.
Focal Number. Reaction Number. Main Reaction Number
Focus Number (Focus Number) - is the extreme value of the Market Swing. This is the point on the chart from which all correction values (Fib Nodes) for a given Market Size are calculated. If the Focal Number is modified, all the Fib Nodes for that Market Size are also modified.
Reaction Number (Reaction Number) - is a low or high point within a given Market Spread. Several Reaction Numbers are possible within a Market Spread. The main Reaction Number is the extremum of the Market Spread.
Determination of F1 and F2 Spread Fib Nodes
Fib-node or node (Fibnode) - is a number based on the ratios that define Fibonacci retracements: support level - if the price approaches it from above, or resistance - when the market approaches it from below. Two Fib Nodes, or Nodes, are calculated: one at the 0.382 retracement level and the other at the 0.618 retracement level between the Focal Number and the Reaction Number.
Definition of Clusters (C)
Confluence "K". - is a point or price area where two Fib Nodes from different Reaction Numbers have the same or nearly the same numerical value. A Cluster can only occur between Phib Nodes 0.382 and 0.618. The area of a Cluster includes the Phib Nodes creating the Cluster and the price range between them.
Fibonacci extension analysis
Determining price levels for taking a reasonable profit
Fibonacci levels allow us to assess the prospects for price movements. Extensions are good benchmarks. Typical Extensions in relation to Movement and Correction are the following:
? OP = B - A + C - Target Point;
? COP = 0.618 (B-A) + C - Pulled Target Point;
? XOP = 1.618 (B-A) + C - Extended Target Point.
Expansions should be built from the impulse that started the price movement. Most often the initial impulse will be within the Intent structure (graphical figure, candlestick formation, etc.).
Combination of Fibonacci retracement and extension properties
Definition of Consent
An Agreement is a price area formed when a Fib Node and a Target Point (COP, OP or XOP) are "close enough" to each other.
Thus, the components of the trading system based on DiNapoli levels are:
? Traditional indicators (MACD, Stochastic, MA) - as a tool for determining Trend direction and moments of its reversal, as well as identifying market entry points near significant Fibonacci levels;
? Intent Signals (including chart patterns, candlesticks) to filter out leading signals of Fibonacci levels, as well as to anticipate further price movements;
? Fibonacci retracement and extension levels and the zones of Accumulation, Date, Agreement as a means to determine the levels of opening/closing a position and setting protective stop orders.
Understanding and combining these tools on the basis of Correction Analysis and Fibonacci Extensions will provide an effective methodology for successful trading on financial markets, using the entire arsenal of a comprehensive approach to market analysis.
Final system plan
1. Determine a preliminary Trend using DMA 3×3.
2. Determine the long-term Trend condition by MACD (9, 19, 9) and DMA 25×5.
3. Determine the state of short-term Corrective Movements by Stochastic (8, 3, 3).
4. Determine if there are Intent signals to anticipate further movement.
5. Compare MACD, Stochastic, DMA and Intent signals: analyze Fibonacci Corrections and Extensions, identify significant Fib Nodes and zones (Convergence, Consensus).
6. Determine the method of entry.
7. Determine reasonable profit taking points (LPO).
Some tactics of opening and stop orders placement based on DiNapoli levels
"Bonsai" - Fibo-level entry and money stop: place an order that will open a position when the price crosses a specific Fibonacci level (or the boundary of the accumulation zone), as well as set a stop order that fixes the maximum loss in the amount that suits us.
"Bushes" is an entry at the Fibo level and a stop at the Fibo level: open a position near the Fibonacci level and place a stop order behind another Fibonacci level different from the position opening level.
"Sapper A" - entry on Corrections at the F1 level and stop behind the F2 level: entry is made just above the F1 level, corresponding to the Correction 38.2% from the 1-F Movement. Stop order is placed just below the F2 level, corresponding to the Correction 61.8% from the 1-F Movement.
"Bomb Squad B." entry on Corrections at the F1 level from the first Reaction Number, the stop is set below the accumulation zone, or under the F2 level belonging to the second Reaction Number.
