Trading the Levels

by Peter Mathers.

I have developed a positive trading tool that will assist the analyst and the trader in utilising the Elliott Wave Theory and Fibonacci sequence. Based on the Golden Ratio of 618, it is also a stand-alone trading method. I have coined it the TradingLevels® and have been using it with great success!

Fibonacci sequence

The Leonardo Fibonacci sequence of numbers are found in the natural world, from your own DNA to the expanding spiraling universe, that unfolds on the Golden Ratio of 618 and it this, that is the basis of the Fibonacci sequence.
With regard to the markets and trading, the Fibonacci numbers have been used in conjunction with the Elliott Wave Theory primarily as discovering proportions and harmony between wave fractals of various Elliott Wave degrees. In this way, analysts use Fibonacci in particular percentages to measure wave relationships mainly via wave extensions, retracements and by assessing the degrees of wave fractals.

Elliott Wave

The Golden Ratio and Elliott Wave fit together, hand in glove. But the trader needs a reasonable understanding of both tools used together – how they assist one another with the same objective outcome, developing the right look and feel i.e. perspective of price action – through experience. If not, it can be a very hit and miss affair and even the most experienced get it right only half the time simply because there are many variants in the now as the actual market wave count unfolds.

However one of the good aspects to Elliott is that when you know you have it right, then you are far ahead of the game. You just need to know when you’re right and when you don’t have a clue, and trade accordingly. This knowledge takes time to develop and is only another small part of the trading total as in Elliott you also need to know how to read the volume and understand the psychology and personality of each move in the wave structure. Then of course there’s your own psychology and own thoughts one needs to get a grip on. This entire story is still incomplete but I can say time spent just being with the market is time well spent.

The TradingLevels^®

Through observation and a little creativity I have developed the TradingLevels^®. This simple tool will assist the trader and the analyst, however I see it more as a traders tool – it is the main supporting tool for my trading and many clients – once the penny drops and you can see it, then you will understand its value.

The TradingLevels® concept uses the Fibonacci sequence of numbers as price ratio

Most traders are familiar with the Fibonacci series of numbers, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144 and so on. The sequence builds on its self, 1 2 = 3, 3 5=8 and so on, you can search online for a deeper look into this fascinating work. But just think for a moment, using the numbers as price ratio, the price becomes the ratio of market growth, these price levels are where corrections occur and the market run to these levels.

What the TradingLevels^® concept does is to take this growth ratio into the world of trading and analysis in terms of charting. With charting we are looking at time and price or essentially space, so in measuring space we use the power of 10, so using the Fibonacci sequence then expanding it by the power of 10 becomes 10, 20, 30, 50, 80,100, then expanding it again 100, 200, 300, 500, 1000 and again – as indices and sectors are higher priced – to 1000, 2000, 3000, 5000, 8000, 10,000, 20,000 and so on. The .618 ratio is still behind the expanding permutations.

Another change has taken place and that is we are now using whole numbers. That is, 20 instead of 21 and 30 instead 34 and 50 instead of 55 and 80 instead of 89 and the beginning of the cycle again 100. The eliminated numbers of 21, 34, 55, etc are also very important, however they now become ‘minor TradingLevels^®.

So, there are major (TL), medium (ML) and minor TradingLevels (mTL)

The basic idea here is to understand that markets, even though they are the same but individually different (they have their own growth patterns) they are made up of trends, corrections and reoccurring patterns, only they get larger as the price moves up through the ratio or TradingLevels^®. This growth is linked to the Fibonacci as price ratio. Because when we look at the sequence as price 1, 2, 3, 5, 8,1 0, 13, 20, 30, 50… it is based on the golden mean/ ratio 618, and in fact the further out the permutations’ occur the truer the .618 becomes.
What you will start to notice is that markets most of the time will have their corrections at these TradingLevels^®. And what is also very interesting is that the Elliott Motive or Impulse wave, that is the basic 5 wave structure will occur between these TradingLevels^® such as between 1 and 2 or 3 and 5, in fact most times it’s the 5th Wave that creates the first high above a TradingLevels^®

TradingLevels^® Table

The Fibonacci Sequence (in bold, with intermediate numbers that are there with the power of 10)
1 2 3 5 8 10 13 20 21 30 34 50 55 80 89 100

3 types of TradingLevels^®: Major, Medium and Minor

Major TradingLevels^®
I have added the power of 10 to the Fibonacci sequence to express the Major TradingLevels^® (they also expand in the sequence)

Trading Level 1 = 1c, 10c, $1, $10, $100, 1,000, 10,000
Trading Level 2 = 2c, 20c, $2, $20, $200, 2,000, 20,000
Trading Level 3 = 3c, 30c, $3, $30, $300, 3,000, 30,000
Trading Level 5 = 5c, 50c, $5, $50, $500, 5,000
Trading Level 8 = 8c, 80c, $8, $80, $800, 8000
Trading Level 13 = 13c, $13 13,000

Major TradingLevels TL are shown as the orange lines on our charts
Abbreviated as: TL

MediumLevels^®
MediumLevels^® are always 50% between all Major TradingLevels^®
MediumLevels^®are shown as the grey lines on our charts
Abbreviated as: ML

Minor TradingLevels^®
Minor TradingLevels^® are also based on the Fibonacci numbers 1, 2, 3, 5, 8. So 11 is a Minor TradingLevel^® 1 as is 21, 31, 41, and so on. Minor TradingLevel^® 1 could be 110 or 1100. The same for mTL2: 22, 32, 42, 52 or 120 and 1200.
Minor TradingLevels^® are are shown as dotted lines on the charts
Abbreviated as: mTL

Special number 72
I also include the special number of 72 in TradingLevels^® analysis
72 = 0.72, 72c, $72, 720, 7200

Major TradingLevelsl^®

I must also point out here, simply to make things easy that all the 1s are called TradingLevel® 1, also called a Major TradingLevel^® and abbreviated to TL1. This includes: 1 cent, 10 cents, $1, $10 $100, $1000 etc. These are all TL1. This is the same for all the 2s, TL2: 2 cents, 20 cents, $2, $20, $200, $2000, 20000; and the same for 3s: TL3; 5s: TL5; 8s: TL8; and 13s: TL13. These are all major TradingLevels®.

There are also Medium Levels and Minor Levels

An example of the Minor TradingLevels® abbreviated as mTL1, mTL2, mTL3, mTL5, mTL8 (these are in between Major and Medium Levels) . Examples: $1.10, $1.20, $1.30, $1.50, $1.80 are all Minor Levels or they are also found between TL1 $100 – TL2 $200.

Exercise: try it yourself

Draw these lines on RIO (or on any stock from one dollar to two dollars, or Oil at TL1 = $100):

mTL1 = $110
mTL2 = $120
mTL3 = $130
ML = $150
mTL8 = $180

Also have a look at the TradingLevels^® as it moves up to TL1 on the Australian Dollar moving up through all the mTLs up to TL1: $1 (50cents, 80 cents and soon 100 cents, the MediumLevels (ML) are 65 cents and 90 cents)

Also look at Gold at TL1: $1000. We trade to these Major TradingLevels, selling into the trend / volume at the TradingLevels^®, trading from one Level to the next.

By understanding all the Major, Medium and Minor TradingLevels^® along the way, we know the probabilities of a correction occurring at the next Level. The TradingLevels^® are a road map through the price taking in the consideration of the stock’s own personality – its footprint on how it treats the TradingLevels^®. Below is a recent example of a market working through from TL1 to TL2.

So what do all these mean anyway
The TradingLevels® are psychological price levels that most markets work to for many reasons, conscious or unconscious. Draw a few lines on the Dow Jones TL8 = 8000, TL1 = 10000 and TL13 = 13000 these are the Major TradingLevels®, remembering that there are Medium TradingLevels® and Minor TradingLevels®. If you are day trading, then use sub-minor TradingLevels® fractals. The same for our local cash market – the XJO ASX200 – draw a few horizontal lines at TL2 = 2000, TL3 = 3000, TL5 = 5000 and you’ll soon get the idea. What’s the Medium TradingLevel® between TL5 and TL8 in the case of our cash market? 6500, this is where the trend failed. And where is it falling to? TL5 = 5000. An example of the minor TradingLevels® on the cash market would be 5100, 5200, 5300, 5500, 5800, then they can be broken down further 5110, 5120, 5130 and so on, these are very valuable numbers if you’re day trading the SPI or the Aussie 200 for example.

In trading stocks or any of the derivatives with the TradingLevels®, the skill required is to become familiar at what can occur at a TradingLevels®, how the market treats the level. To find the fingerprint or the stocks natural movement, you simply look at its history – the way it moves and the way it treats the TradingLevels® – this is how it will continue to operate. But remember that the trends and the corrections are going to increase on the ratio – through the TradingLevels® i.e. price ratios 1, 2, 3, 5… the numbers are expanding – that means the price is expanding and the market is expanding in trends and corrections. The market simply grows like a tree and knowing that the next trend or correction is going to be larger will help in handling it.

Learn to love corrections; because, corrections are where you lose money – like touching a hot stove, you tend to avoid pain by not going back there. The TradingLevels® are where the corrections occur, we trade from one level to the next level and exit, the market unfolds its correction at the TradingLevels®. Once the correction is complete and the market is back above the TradingLevels® then we enter the trade.

I’m not saying it’s easy, but as you can see in the chart below, the entries are above the levels and the exits are at the next level. If a market has been correcting at previous levels then its highly likely that it will correct at the next TradingLevels®. Because you have tuned into the fractal growth pattern that the traders have created, you are now starting to work with the market.

The daily chart below on IPL shows a stock travelling from $100 to $200 or TL1 to TL2, these are the major TradingLevels. In between the major TradingLevels is one MediumLevel which is 50% between the major TradingLevels at $150. It is the MediumLevel where we expect to have the largest correction that is, between the major TradingLevels®. It is also the first point where a trend may fail, the second point is mTL8. So when we are trading between two major TradingLevels® we can expect with very high probability corrections to occur at the Medium TradingLevels® and the Minor TradingLevels®. This is very valuable knowing the likelihood of a correction occurring at a particular price and the probable size.

Note the TradingLevels® on IPL chart. Major TradingLevel® TL1 = $100 the minor TradingLevels® are mTL1 = $110, mTL2 = $120, mTL3 = $130, mTL8 = $180. The Medium TradingLevel® is $150
In the chart below, we have mentioned three levels Major Medium and Minor, because we are working with fractals there are even smaller levels, so at the current price of the stock the levels would be 165 and 172. Look at any stock that has traded through these levels – you will need to actually draw the horizontal line on the chart for the penny to start dropping on the concept. There is a TradingLevels® Template for Metastock for download at the tradinglounge site.

One of the benefits of the TradingLevels® is that because corrections mainly occur at the TradingLevels®, it brings your awareness to the corrections, if corrections are where you lose money then understanding them is imperative. Bear markets are normally just large corrections of one higher degree which a market recovers from. In Elliott there are about a dozen corrections and you learn them one by one. You build your knowledge of corrections and once you have this then you can start taking positions in the ending of the correction as the balance of the correction tilts in the next direction. The first part of a correction is profit taking, normally the top i.e. check the volume, the beginning of the first leg down is the beginning of the fear creeping in, then the stops get triggered and as this happens the market picks up speed, then value hunters create the first support, all of this is based on volume and will occur at certain whole numbers, i.e. the TradingLevels®. Its mostly about trading between support and resistance, and the chart patterns will be a mix of Elliott and the stocks own personality patterns. If you’re entering at the end of the correction you’re then part of the engineers of the up and coming trend and your risk reward will improve as you don’t need to chase the trend and this is what the TradingLevels® assist you with, the entries, (scaling in), stops (where to place them) and the exits. The TradingLevels® are to improve the timing aspect of the trade, they draw the line in the sand, so to speak, they work with the markets.

What you will also learn with the TradingLevels® is that each price has a certain strength or weakness or as I like to see, it also has a personality. This reflects first in traders tending to think in even numbers – more trades will go through on even numbers (or odd numbers if they are whole) especially 10, 20, 30, 50 rather than 9, 19, 29, so you would place you stops at odd numbers, when most traders are thinking of a stock moving up or down to a whole number (normally the next closest big whole number) so the numbers become more psychological even though a stock may have a certain fundamental value, it will move and behave in an emotional manner. This is what Elliott Wave was established on and the Fibonacci TradingLevels® and at the same time they are part of nature which makes this all very fascinating. In fact the 5 wave structure of Elliott Wave normally works itself between two major TradingLevels®, it is normally the 5th wave that creates the first high above the TradingLevels® and one of the handful of corrections that unfold from that TradingLevel® into the minor and medium TradingLevels®

The chart below, works very smoothly with the TradingLevel®, only the major and medium TradingLevel® are present on the chart but as you can see the market works very neatly with them, whereas the above chart moves in a more volatile manner but still works with the TradingLevel®. Markets are the same but different and each one will also work with the TradingLevel® in its own way. This is part of the fingerprint of movement that you need to study closer and its when you start to understand the subtleties that consistency in your trading arrives.

The TradingLevel® work from penny stocks right through to indices, sectors and commodities. They can be used in either micro or macro format because they are a reflection of natural patterns in the markets. We have used them for our retail and wholesale clients with great success and I hope you take the time to look into the TradingLevels®.

Peter Mathers
Trading Analyst

www.tradinglounge.com.au
T: 02 9566 4520
M: 0422 418 158
E: info@tradinglounge.com.au