Carolyn Boroden on How to Trade Financial Futures Using Fibonacci Price Clusters

Most traders have heard of using single Fibonacci price relationships (such as price retracements) to help define potential support and resistance points in a market. Many traders, however, are less familiar with the concept of “clustering” these and other price relationships to define high probability, relatively low-risk trading setups.

For the purposes of this trading strategy, a “setup” occurs when the analyst sees a coincidence of at least three Fibonacci price relationships that come together within a relatively tight price range. This coincidence of price relationships will define a key price support or resistance zone for a potential trade entry.

These Fibonacci projections will be made from “key” swing highs and lows obvious on the particular chart we are analyzing. (There is a bit of an “art” to selecting the key highs and lows that are relevant to creating these clusters.) To find a “cluster” of relationships, we run Fibonacci price retracements, price extensions and projections from all key swing highs and lows on a particular chart.

To make these projections, we use the ratios defined from the Fibonacci # series. The ratios generally used are: .382, 50, .618.786, 100, 1.272 and 1.618. At times, we will use .236, 2.618 and 4.236 as ratios to confirm other levels.

Once we identify one of these price “clusters”, we use a “trigger” as a filter to enter a trade against a particular Fibonacci price zone. Note that many of these zones are violated each day. This is why we use a trigger for trade entry. This raises our odds of success.

If a zone is not going to hold, a high % of the time, you will not see an entry trigger against it. When we do see a trigger against a zone, and the trade fails, however, our risk is extremely well defined by the cluster zone. (Stops can be placed above or below the extreme of the cluster zone.) My favorite trigger for entries against these zones is the Commodity Channel Index (CCI) as taught by “Woodie” of www.woodiescciclub.com.

Let’s go over a few relatively recent examples.

The first chart example is a 15-minute S&P E-mini. After we ran all possible combinations of price relationships, a “cluster” stood out at the 1132.75 - 1133.50 area. This zone included at least three Fibonacci price relationships. A low was made at 1133.25, which was followed by a healthy rally to the 1139.00 handle.

The next example is a 15-minute ES chart. We had a coincidence of at least four Fibonacci price relationships in this example in the range: 1118.90 - 1119.50. The actual low was made at 1119.50. We took our buy triggers from the 3-minute chart against this zone.

This next example is the 5-minute Mini Dow contract. We saw a healthy price cluster in the area: 10272 - 81. The actual low was made at 10280, which was followed by a huge rally for this contract.

Our last example is in the Euro contract. We saw at least three price relationships come together in the range: 11810 - 13. The actual low was made at 11812.

Again, remember that these price “cluster” trades do not always work. As a matter of fact, many of them are blown through everyday with barely a pause. When you combine these zones with your favorite trigger / filter, however, your odds of success are greatly improved.