Trading Equilateral Triangles with Fibonacci
Fibonacci numbers are all about particular numbers, their sequence and their relationship. Leonardo Pisano (better know as Fibonacci) was a mathematician who was born in Italy around 1170 AD. He discovered a relationship of numbers known as the Fibonacci sequence in which each successive number is the sum of the two previous numbers: 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, and so on.. These numbers have an unusual relationship where any given number is approximately 1.618 times the preceding number and any given number is approximately 0.618 times the following number. Fibonacci numbers and the golden ratio occur in nature astoundingly often, and can be strongly associated with many commonly occurring market patterns.
These Fibonacci relationships are applied to chart analysis to establish levels which will often indicate what will happen next. Traders use these levels to watch for a possible change in direction. The use of Fibonacci expansions is supported in any good charting software and generally they use the following expansion levels of a range: +61.8%, +161.8% and +323.6%. The range expansion relationships are used to locate potential trend turning points.
Among all the chart patterns that are used by traders, the triangle patterns are most commonly used.
The triangle patterns occur in different forms, such as symmetrical triangles, ascending triangles, descending triangles, and even wedges and pennants, which are classified as triangle patterns. While each has its own characteristic for entering a trade, the exits of the trades based on these patterns are very general and not very specific in nature.
Here we look at trading a triangle formation using Fibonacci, where we can define our entries, exits and stops very specifically. While this can be applied to all types of triangles, there are certain parameters that have to be met for applying this strategy.
First and foremost for this strategy, we define our triangle with lines drawn on fractal bars only.
Let us define what a fractal bar is. A fractal high bar forms, when the said bar has a higher high than the bar preceding it, and the bar subsequent to it. Similarly a fractal low is formed when the said bar has a lower low than the bar preceding it, and the bar subsequent to it.
The first diagram shows what a fractal bar would look like –