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42

Can you get out of the above situation on a moving average? Only if the initial uptrend has been going on long enough for the MA to show some kind of containment. But what if that initial up-!eg was short term, then what?

What Im trying to do here is to point out the weaknesses in Fibonacci usage. I run into them ail the time, and that is why ! limit the use of Fibonacci to the ways I show in this Manual.

As shown in Part II, I wouid be looking for / and \/\ as warnings, and , or \ / tc get out.

Prices dont always make a .382 retracement, thats why 1 use a 4 day MA to enter an established trend. Lots of times prices go past a .382, but fail short of a .500 retracement. That is to be expected, and can be planned for.

Similarly, many times prices go past a .500 retracement but fall short of a ,618 retracement. This, too, has to be anticipated.

Finally, there are ail too many times when prices retrace past the .618 ratio,

it is these exceptions that have to be planned for in trading. I plan for them ahead of time. 1 wil! not blindly use Fibonacci and try to force the markets to fit into that set of numbers. Doing that has been the undoing of many a trader.

As close as Fibonacci is to reality, it still fails to give the right answer much of the time. Too much of the time to suit me. I try to never make the mistake of watching prices go to a Fibonacci retracement and think that there is some sort of magic barrier there - because there isnt. I want to see some other signs besides a Fibonacci ratio thai tell me that prices have finished their retracement. That is one reason that a #2 (Ii) point breakout is so important to me; the percentages for success are much higher.

In iike manner, 1 try to never make the mistake of watching prices fall short of a Fibonacci retracement ratio and think that somehow they have to go on and reach that number.

The greatest puzzlement I have using Fibonacci is when 1 am faced with this situation:

/\ or \

/ \ this \

/V \ /

/ \ \ /

/ \ /

/ \/



Assuming each of those had ended at a Fibonacci retracement, do I then expect a retracement of the last leg to a Fibonacci ratio and then a reversal like so:

/\ \

/ \ . \ ?

/ \ / . \ /\ .

/ \ / \ / \

/ \/ ? \ / \.

/ \ /

/ \/

Or do I anticipate an expansion to new highs or lows like so:

/ \ / \

/\ / \ /\

/ \ / \ / \

/ \ / \ / \

I \l \l \

What is the reasonable expectation from a swing? Will it neatly fit into Fibonacci ratios? The two expansions shown above are quite common. I see them all the time as head and shoulders formations. I dont have the answers to these questions Ive been raising. To date Ive not met anyone who does!



Trading By The Book - Part Iii Elliot Waves

Now, if I may be permitted, I wiil state why I never use them. It is simple - they dont work for me. 1 can never figure out which wave Im supposed to be in. Is this the fifth wave of a larger third wave, which is nestled in an even larger 1st wave? I dont know and I dont want to know! It beats me how anyone can make sense out of all that What is the biggest wave ever, and when did it start? This wave that Im seeing now, is it the millionth wave within a wave since ail waves started? Where does it all end?

Im sure if i couid ever figure out these "Elliot" waves, I could make a lot more money than I do now. Why? Because I wouldnt have to trade anymore. I could make e fortune with a newsletter teiiing everyone eise what they mean. Who could ever prove me wrong? In fact, I would not have to even understand "Elliot" waves to make a fortune - i could just pretend to understand them. Im sure no one would ever know the difference, Im not even able to fade wave traders. Why? Because not enough of them agree on which wave they are in to cause any real effect on the markets.

Cycles

Some time ago, 1 spent a prodigious number of hours trying to understand and utilize cycles in my trading. I developed a pile of charts, numbers, and renderings of all sorts that I truly believe was approaching 4 feet in height.

I really believe in cycles. Im sure that they exist. I would never deny them for on minute. But i dont use them in my trading. Why? They are too imprecise!

I have come to the conclusion that the use of cycles in trading futures is an attempt to fit something natural to something unnatural. Cycles are natural, they occur everywhere in nature. But markets are not necessarily natural.

What I find in markets that makes them unnatural is intervention by men. Government announcements and pronouncements cause markets to act counter-cyclically. Wars and rumors of wars do the same. Meetings of OPEC, the Ivory Coast Cocoa people, the Coffee group and such, all can make a market go off cycle.

There is another problem with cycles, and its much like the problem with Elliot waves - I never know which cycle Im supposed to be in.

Is this the minor low within an intermediate high? Or does the major low due sometime next week supersede the rise in prices Im staring at on my charts this week?

What is the largest cycle anyhow, and what is the smallest? Which cycle seems t best fit a particular market - or am I trying to fit the market to a cycle? Ive never been able to find the answer to these questions, though I have tried mightily to do so.

Probably the best use of cycles Ive encountered Is the use of them to filter 1-2-3 formations and Ross hooks. These seem to work best when they occur coincident or nearly coincident with the average cycle of a market.



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