Trend-Trafficâ„¢ Trader Guide - Fibozachi
Transcript of Trend-Trafficâ„¢ Trader Guide - Fibozachi
© 2013 Fibozachi LLC – www.fibozachi.com. All Rights Reserved.
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An Overview of Trend-Traffic™: Page 3
Trend-Traffic™ Lights: Stop! … Wait! … Go! Page 4
Fibozachi Inflection Bands™ (FIBs™): Support & Resistance Breakout Bands Page 6
- FIBs™ vs. Bollinger Bands: Sorting Through “White Lies” Page 7
- Finding Truth in the Character of Price Action Page 9
- Isolating Breakout Conditions with FIBs™ Page 10
Trend-Squeeze™ Indicators: Advanced & Flexible Trend Analysis Page 13
- An Overview of the Trend-Squeeze™ Indicators Page 14
- Trend-Squeeze™ Ribbon Page 14
- Trend-Squeeze™ PaintBar Page 15
- Trend-Squeeze™ Oscillator Page 16
Squeeze-Plays: Volatility & Price Explosions Page 17
- Isolating Ideal Squeeze-Play Long Entries Page 18
- Isolating Ideal Squeeze-Play Short Entries Page 19
DOBOS™: Dynamic OverBought/OverSold Levels Page 20
- DOBOS™ Parameters & Input Settings Page 21
A Unified Trading Approach: The Search for Multiple Confluence Page 22
- Bullish Breakout Conditions Page 22
- Bearish Breakout Conditions Page 23
- Trend Neutral Breakout Conditions Page 24
- Continued on Next Page –
© 2013 Fibozachi LLC – www.fibozachi.com. All Rights Reserved.
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Expert Advice & Tips: Page 25
- Use FIBs to Pinpoint Support & Resistance Levels Page 25
- Locate High-Probability Trend Reversals Page 27
Automated Scanning Capabilities: Finding Squeeze-Plays & Trend Reversals Page 30
- NinjaTrader Market Analyzer Page 30
- TradeStation RadarScreen Page 32
- TradeStation Scanner Tool Page 33
State of the Art “Divergence Engine”: Automatic Divergence Detection Page 35
Beginner’s Guide to Divergences: An Introduction to Divergence Trading Page 36
- Bullish (Positive) Divergence Page 37
- Bearish (Negative) Divergence Page 38
- Filtered Bullish (Positive) Divergence Page 39
- Filtered Bearish (Negative) Divergence Page 40
An Overview of the Divergence Features: Page 41
An Overview of the Divergence Input Settings: Page 43
Extensive Customer Support: Page 45
Risk Disclosure Statement: Page 46
© 2013 Fibozachi LLC – www.fibozachi.com. All Rights Reserved.
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The Trend-Traffic™ Indicator Package contains a collection of easy-to-use trading
indicators that show an accurate diagnosis of the trend, precise support &
resistance levels, and special volatility-based “Squeeze-Play” signals. Beginners
will benefit from the accurate, trader-friendly Trend-Traffic™ Lights and FIBs™;
meanwhile expert traders will truly appreciate the advanced features and infinite
flexibility offered by the Trend-Squeeze™ Indicators.
The indicators included within the Trend-Traffic™ Indicator Package are:
© 2013 Fibozachi LLC – www.fibozachi.com. All Rights Reserved.
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The Trend-Traffic Indicator is used in the same manner as a traffic light, where
Green = Buy, Red = Sell and Yellow = Transitioning or Trend Neutral.
Based purely on mathematical ratios between specific price levels, its
extraordinary accuracy has best served us as a confirming indicator and setup
trigger. Using the default settings, the Trend-Traffic Lights remain ever
sensitive to price change, requiring its user to remain somewhat nimble.
However, the “Length” setting can be modified, allowing you to determine how
much price information will be utilized by the algorithm when calculating the trend.
© 2013 Fibozachi LLC – www.fibozachi.com. All Rights Reserved.
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A bullish trend exists when two or more Green Lights plot in succession alongside
increasingly higher closes.
A bearish trend exists when two or more Red Lights plot in succession alongside
increasingly lower closes.
When a Yellow Light plots, it indicates that price action lacks directional
conviction. When appearing amidst a strong trend or a series of consecutive
Green or Red Lights, a single Yellow Light usually coincides with routine profit
taking consolidations. However, a cluster or series of successive Yellow Lights
often signifies an important turning point in an underlying trend, highlighting either
a marked waning of trend or an outright transition.
© 2013 Fibozachi LLC – www.fibozachi.com. All Rights Reserved.
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We at Fibozachi have significantly increased the predictive value of Bollinger
Bands by modifying their standard input values of “Length” and “Standard
Deviations” to reflect harmonically reactive numbers and their derivative ratios
rooted in the Fibonacci sequence. We have also coded smoother bands that
much more accurately reflect price action by utilizing an average of the Open,
High, Low and Close (OHLC); this stands in direct contrast with the “default”
calculation of Bollinger Bands, which only measure closing prices.
We believe that this method of averaging OHLC price action enables Fibozachi
Inflection Bands™ to serve as much greater barometers of support and resistance
since their calculation incorporates all aspects of price action rather than simply
the close, which may ignore noteworthy highs and lows.
From data calculation techniques to specific input settings to expert designer tips,
this user guide describes each of our unique modifications alongside detailed
guidelines, specific trading strategies and illustrated examples.
© 2013 Fibozachi LLC – www.fibozachi.com. All Rights Reserved.
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If you have ever studied Bollinger Bands, then you might have noted, “These cute
things almost work once in a while;” and if you have attempted to trade with them,
then you must have realized that they do not provide accurate timing signals.
Whether referring to the “20” period or the “2” standard deviation, these almost
arbitrary input settings simply do not accurately reflect the highly recurring, fractal
nature of market cycles. Can you decipher accurately timed buy and sell signals
out of the Bollinger Band example below? We cannot either.
© 2013 Fibozachi LLC – www.fibozachi.com. All Rights Reserved.
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Now look at the exact same chart overlaid with Trend-Traffic™ Lights and
Fibozachi Inflection Bands™ (FIBs). Upon first glance, your eyes immediately
discern both the direction and the strength of trend. In stark comparison to the
Bollinger Band example above, note how price action continually respects the
FIBs, as if price itself knows exactly where they are. FIBs require NO guesswork
for two simple reasons: first, since price action so clearly respects the FIBs, you
can easily see where the downtrend loses steam, begins to transition, reverses
direction upward and confirms the breakout; second, Trend-Traffic™ Lights
provide an added visual confirmation of trend based upon price action over the
most recent 3-5 bars.
© 2013 Fibozachi LLC – www.fibozachi.com. All Rights Reserved.
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Most individual traders tend to focus on trend trading and breakout trading with the
aid of clumsy, lagging indicators like Bollinger Bands. Such lagging indicators do
not provide accurate timing signals and entirely fail to account for the character of
price action. For instance, compare the messages conveyed by the location of
Bollinger Bands versus Fibozachi Inflection Bands™ across numerous dojis and
hammers appearing in the middle of our two chart examples above.
Lagging Bollinger Bands do not anticipate short-term price action or signal
important turning points in the market and can only provide a technician with
generalities to weigh. In marked contrast, leading Fibozachi Inflection Bands™,
specifically designed for trend-based trading strategies with Trend-Traffic™ Lights,
allow you to determine the direction of trend upon first glance while also providing
valuable insight into market character. Where Bollinger Bands fail to account for
the actual trading issues of timing and execution, FIBs™ allow for clear-cut
guidelines, explicit rules and defined strategies to help identify, isolate, time,
execute and manage ideal trades.
We at Fibozachi believe that Bollinger Bands can in fact provide predictive value,
just not in their current form and not with statistically inferior input values. While
simply too voluminous to thoroughly detail here, suffice it to say that the harmonic
rhythm of the Fibonacci sequence does in fact provide a highly accurate
mathematical foundation from which repeatedly occurring market cycles may be
tracked; hence the robust accuracy of our Fibozachi Inflection Bands™.
© 2013 Fibozachi LLC – www.fibozachi.com. All Rights Reserved.
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We at Fibozachi use the FIBs™ as an extremely accurate and simple way of
assessing both the direction as well as the underlying strength of trend. Unlike
standard Bollinger Bands, which poorly attempt to constrict price within their
Bands, Fibozachi Inflection Bands™ are designed for use in exactly the opposite
way; we patiently wait for price action to breakout either above the Upper FIB or
beneath the Lower FIB and then ‘hop on board’ when Trend-Traffic™ Lights
signal confirmation.
The following chart examples show how you can utilize the Trend-Traffic™ Lights
and Fibozachi Inflection Bands™ to isolate breakouts and accurately trade bullish,
bearish and transitioning or trend neutral market conditions.
© 2013 Fibozachi LLC – www.fibozachi.com. All Rights Reserved.
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When price closes above the Upper FIB for two or more successive bars and has
generally moved upwards over the last 3-5 bars.
When price closes beneath the Lower FIB for two or more successive bars and
has generally moved downwards over the last 3-5 bars.
© 2013 Fibozachi LLC – www.fibozachi.com. All Rights Reserved.
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When price is either constricted within the FIBs or is fluttering around the Midline,
the current trend is either neutral or undergoing a transition. For this simple
reason, prudence advises waiting for price action to decisively breakout of the
FIBs and plot at least one addition follow through bar in the same direction
alongside a correspondingly higher or lower closing price.
© 2013 Fibozachi LLC – www.fibozachi.com. All Rights Reserved.
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Trend-Squeeze™ is a collection of Indicators (Ribbon, PaintBar & Oscillator) that
accurately diagnose and color-code the direction of the trend, while
simultaneously detecting extreme contractions in volatility that are known as
“Squeeze-Plays”.
Unlike other trend-based indicators on the market, the Trend-Squeeze™
Indicators have several advanced features and optional customizations that
enable users to drastically modify how the trend is calculated and plotted. The
algorithm which powers the indicators is quite unique in that it incorporates the
elements of “Inertia” and “Responsiveness” into its calculations. This is incredibly
beneficial to traders because modifying the “Inertia” or “Responsiveness” values
can drastically change how the trend is calculated and how it appears when
plotted. This enables the indicators to be infinitely ‘flexible’, giving you the ability
to ‘hand-craft’ your own perfect trend-based indicator that is ideal for your specific
trading style and personal preferences.
© 2013 Fibozachi LLC – www.fibozachi.com. All Rights Reserved.
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The Trend-Squeeze™ Indicators come in the various forms of a Ribbon, PaintBar,
and an Oscillator. The following is an overview of each indicator:
The Ribbon is plotted as a small, color-coded bar in a lower subpanel to provide a
quick and simple summary of the current strength and direction of the underlying
trend. The Ribbon is beneficial to traders who wish to prevent or avoid “chart
clutter” as a result from using too many indicators at once.
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The PaintBar color-codes each bar to show the direction and strength of the trend.
The PaintBar is beneficial in that it allows for quicker and easier identification of
the trend. Furthermore, it can also help to avoid “chart clutter” since it does not
have to create an additional subpanel.
© 2013 Fibozachi LLC – www.fibozachi.com. All Rights Reserved.
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The Oscillator provides an in-depth perspective of the direction and strength of the
trend by plotting the actual values that are calculated by the Trend-Squeeze
algorithm. This enables traders to pinpoint when a bullish or bearish trend may be
waning and losing its momentum, thereby allowing for more accurate chart
analysis and better timed entries and exits. Furthermore, the Oscillator employs
our state-of-the-art Divergence Engine, which transforms it into an incredibly
powerful and robust trading indicator.
Page 33 of this guide contains a full section on the Divergence Engine and how to
use the Oscillator’s divergence features. It is definitely a ‘must-read’ section, so
we strongly urge you to check it out!
© 2013 Fibozachi LLC – www.fibozachi.com. All Rights Reserved.
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“Squeeze-Plays” are trading signals that highlight extraordinary contractions in
both volatility and Average True Range (ATR) in anticipation of their immediate
and explosive re-expansion alongside powerful thrusts in price action; like a
rubber band stretched to its maximum point of tension.
As price moves up and down, you will begin to notice that the distance between
the Upper FIB and Lower FIB is constantly changing. During periods of
consolidation or sideways price movement, the FIBs™ will often contract and
become very closely together. When the FIBs™ contract beyond a certain
threshold, special Squeeze-Play signals are triggered to alert traders to the
increased likelihood of a big price move. When both volatility and the FIBs™
begin to re-expand, price often explodes to the upside or downside; allowing
traders to make large profits in just a small amount of time (over the course of the
following 5-20 bars).
© 2013 Fibozachi LLC – www.fibozachi.com. All Rights Reserved.
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1) Identify and Isolate a valid Squeeze-Play signal
2) Analyze the Trend-Squeeze™ Oscillator leading up to the Squeeze-Play
signal, paying particular attention to the degree of slope within the prior downtrend
3) Ensure that the Trend-Squeeze™ Oscillator is transitioning into a bullish
posture with an upward trajectory and a positive divergence
4) Ideal bullish Squeeze-Plays appear either just below the ZeroLine with
confirmation occurring upon an upward penetration of the ZeroLine, or just above
the ZeroLine with confirmation occurring upon a successful retest of the ZeroLine
© 2013 Fibozachi LLC – www.fibozachi.com. All Rights Reserved.
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1) Identify and Isolate a valid Squeeze-Play signal
2) Analyze the Trend-Squeeze™ Oscillator leading up to the Squeeze-Play
signal, paying particular attention to the degree of slope within the prior uptrend.
3) Ensure that the Trend-Squeeze™ Oscillator is transitioning into a bearish
posture with a downward trajectory and a negative divergence.
4) Ideal bearish Squeeze-Plays appear either just above the ZeroLine with
confirmation occurring upon a downward penetration of the ZeroLine, or just below
the ZeroLine with confirmation occurring upon a failure to reclaim the ZeroLine.
© 2013 Fibozachi LLC – www.fibozachi.com. All Rights Reserved.
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We at Fibozachi have added an innovative and proprietary new feature to many of
our Indicators called "DOBOS™", which stands for “Dynamic
OverBought/OverSold Levels”. These special OB/OS Levels are calculated using
recent price movements and Indicator values, which help to determine exactly
where the Indicator will become OverBought or OverSold, based on the current
market environment. This is a significantly more accurate and effective method of
determining the OverBought and OverSold Levels of an Indicator. Instead of
always using static values like “80” and “20”, DOBOS™ will automatically
synchronize the OB/OS Levels after each bar so that you remain in perfect
harmony with the current market.
Market environments are rapidly changing and price often behaves much
differently during one period of time than another … this holds true whether you
are trading on a 1-minute chart or a monthly chart. Therefore, it is vital that the
Indicators we use to trade are able to recognize and adapt once a market or price
begins to behave differently. Using static OB/OS Levels that never change is just
not reliable or effective since both price and the market environment is constantly
changing and evolving. Our “DOBOS™” Levels overcome this problem by
adapting to the recent market behavior and pin-pointing the ideal values for where
the OverBought and OverSold Levels should be, based on the current market
environment.
© 2013 Fibozachi LLC – www.fibozachi.com. All Rights Reserved.
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OB/OS Lookback Period: This is the number of bars used for calculating the
OB/OS values. Since part of the formula references the Min/Max range of
indicator values over the "Lookback Period" number of bars, using a longer
number like the default "200" will provide stable longer-term OB/OS levels,
whereas a shorter setting of say "50" will act more like "Deviation or Bollinger
Bands" in the way that they move (more closely with the indicator's peaks and
troughs).
OB/OS Buffer: This extends the OB/OS levels so that they are more difficult to
penetrate. This setting should be a value between 0 and 1.0 and you can
experiment with it to adjust how 'strict' the OB/OS levels are (how often they are
penetrated).
Show OB/OS Crossovers: These signals occur when the Indicator value
crosses above or below the OB/OS Levels.
Show DOBOS™ Reversals: These reversal signals are a blend of conditions
that must occur along with the Indicator value being either OB/OS and reversing
its slope. If all conditions are satisfied, then a DOBOS™ Reversal signal is
generated and plotted. These signals are rare, yet they are extremely accurate
and often catch major tops and bottoms in price.
© 2013 Fibozachi LLC – www.fibozachi.com. All Rights Reserved.
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Combining signals from Trend-Traffic™ Lights and Fibozachi Inflection Bands™
with the Trend-Squeeze™ Ribbon, PaintBar and Oscillator provides multiple
confluence based confirmation for higher probability trade setups.
When Green Lights plot while price action closes above or “rides” along the
Upper FIB, initiating or holding a long position is advised/desirable. An ideal
location for a protective stop would be just below the Midline or, if you prefer a
looser stop, just below the Lower FIB. While Trend-Traffic™ Lights anticipate
short-term direction; note how the Trend-Squeeze™ Oscillator and FIBs™ each
continually diagnose the underlying power of trend.
© 2013 Fibozachi LLC – www.fibozachi.com. All Rights Reserved.
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When Red Lights plot while price closes below or “rides” along the Lower FIB,
initiating or holding a short position is advised/desirable. An ideal location for a
protective stop would be just above the Midline or, if you prefer a looser stop, just
above the Upper FIB.
Once again, note how Trend-Traffic™ Lights anticipate short-term direction and
how price action continually respects the FIBs™. Both the Trend-Squeeze™
Ribbon and Oscillator remained firmly bearish from the onset of the initial
downturn, repeatedly offering short signals at the end of August, the beginning of
September and the final week of September just prior to an outright crash that
lasted well into October.
© 2013 Fibozachi LLC – www.fibozachi.com. All Rights Reserved.
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When the Lights and FIBs™ are in disagreement (e.g. price action above the
Upper FIB with Yellow or Red Lights), we suggest giving priority to the FIBs™ as
the more dominant indicator between the two. In other words, if price is above the
FIBs™ and Trend-Traffic™ Lights are Yellow or Red it usually signifies profit
taking consolidation rather than a significant trend reversal. Suffice it to say that if
price action were to exhibit a significant directional trend that both the Trend-
Traffic™ Lights and FIBs™ would be in agreement.
© 2013 Fibozachi LLC – www.fibozachi.com. All Rights Reserved.
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When a wide-range bar gaps or closes significantly outside either the Upper FIB
or the Lower FIB, you should not “hop on board” after such drastic movement.
Instead, price action will often consolidate sideways or back into the closest
Fibozachi Inflection Band™ before then resuming movement in the primary
direction. For example, after a large upwards breakout, price action will usually
consolidate sideways towards the Upper FIB.
Both the Midline and the Lower FIB will then often act as resistance levels for any
countertrend move. Usually the bars will fail to close below the Midline; however,
the lows of some bars may test the Midline or Lower FIB.
© 2013 Fibozachi LLC – www.fibozachi.com. All Rights Reserved.
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Conversely, after a large downward breakout, price action will usually consolidate
sideways towards the Lower FIB.
Both the Midline and the Upper FIB will then often act as resistance levels for any
countertrend move. Usually the bars will fail to close above the Midline; however,
the highs of some bars may test the Midline or Upper FIB.
© 2013 Fibozachi LLC – www.fibozachi.com. All Rights Reserved.
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Attempt to isolate securities that have remained in trend either significantly above
or below their FIBs™ for several consecutive bars. If price action consolidates
sideways after a prolonged move outside of the FIBs™, be on high alert for an
upcoming breakout in the opposing direction. In such situations, just one or two
engulfing bars that traverse the Midline can accurately diagnose both a high
probability reversal pattern as well as the onset of a strong new trend.
Diagnosing specific candlestick patterns and correctly interpreting changes in
volatility help a technician confirm that a significant trend reversal is at hand. We
at Fibozachi use our Candlestick X-Ray™ Package to diagnose candlestick
patterns and our V-Coils™ & NR-Breakouts Volatility Compression Package to
highlight only meaningful contractions and expansions in volatility.
In the weekly chart example of USO on the next page, note how every real body
closed above the Upper FIB during the rise from 70 to 120. From the very first
candle, which vaulted off support at the Lower FIB, price action rode along above
the Upper FIB with Green Trend-Traffic™ Lights confirming a strong bullish trend
for long positions until the absolute peak.
© 2013 Fibozachi LLC – www.fibozachi.com. All Rights Reserved.
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A bearish engulfing Marubozu candle that closed underneath the Midline
alongside a single Yellow Trend-Traffic™ Light confirmed the end of the uptrend.
The next candle kissed the Midline, closed underneath the Lower FIB and
confirmed a strong bearish trend for short positions as Trend-Traffic™ Lights
changed to Red. Over the next seven months, as USO continued to crash from
over 105 to under 30, the Lower FIB accurately contained price action for more
than 75 points without a single real body closing above it!
© 2013 Fibozachi LLC – www.fibozachi.com. All Rights Reserved.
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On March 4th USO broke above a previous price peak and closed the week with a
real body above the Lower FIB for the first time in over 7 months and 75 points;
note how a single Yellow Trend-Traffic™ Light gave confirmation to cover short
positions.
The next candle was a doji that gave a long overdue touch of the Midline and
constructively closed within both the FIBs™ as well as the top 10% of the previous
candle; even though this weekly candle closed down, notice how the Trend-
Traffic™ Lights confirmed the onset of a new bullish trend as they turned Green.
After successfully testing the exact boundary of the Lower FIB one more time in a
series of 1’s and 2’s, USO followed through to the upside. From March into April,
its real bodies continued to close just inside of the Upper FIB while its lower
shadows continued to find support at the Midline. By the end of April, a larger
series of 1’s and 2’s found completion yet again at the exact boundary of the
Lower FIB where price vaulted above the Upper FIB and continued to run from
26 to 40 in just 7 weeks.
© 2013 Fibozachi LLC – www.fibozachi.com. All Rights Reserved.
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Trend-Traffic™ also includes a special pre-formatted “Market Analyzer” Indicator
and template for all NinjaTrader users. All of the columns, colors, and text are
completely customizable so that you can personalize it to your own preferences.
As you can see from the screenshots below, using Trend-Traffic™ with the Market
Analyzer allows you to quickly scan an entire list of symbols for the most important
information in just seconds! Furthermore, you can sort the data by any column to
organize your scan results into easy-to-read lists.
© 2013 Fibozachi LLC – www.fibozachi.com. All Rights Reserved.
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The following is an overview of the various columns and their purpose:
Current Bar: The cells in this column show the trend color of the current bar.
Previous Bar: The cells in this column show the trend color of the previous bar.
Bar Count: The values in this column refer the number of consecutive bars with
the same color or trend status. For example, if the “Current Bar” cell is “Green”
and the “Bar Count” is “5”, it means that a strong bullish trend has existed for the
last “5” consecutive bars. Note that the “Bar Count” values will change depending
on whether “Four Color Activation” is set to True or False.
Trend Crossovers: This column alerts you to all valid trend crossover signals
that occur when the trend changes from bullish to bearish or vice versa.
Divergences: This column alerts you to all valid divergence signals.
A special pre-formatted Market Analyzer template is included for all NinjaTrader
users, although some traders may still choose to create their own templates. You
must adhere to the following values when setting up your own cell conditions:
© 2013 Fibozachi LLC – www.fibozachi.com. All Rights Reserved.
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Trend-Traffic™ also includes a special pre-formatted “RadarScreen” Indicator and
workspace for all TradeStation users. All of the columns, colors, and text are
completely customizable so that you can personalize it to your own preferences.
The following is an overview of the various columns and their purpose:
Bar Count: The values in this
column refer the number of
consecutive bars with the same
color or trend status. For
example, if the cell is “Green”
and the count is “5”, it means that
a strong bullish trend has existed
for the last “5” consecutive bars.
Current Bar: The cells in this
column show the trend color of
the current bar.
Previous Bar: The cells in this
column show the trend color of
the previous bar.
Crossovers: This column alerts you to all valid trend crossover signals.
Squeeze-Plays: This column alerts you to all valid “Squeeze-Play” signals.
Divergences: This column alerts you to all valid divergence signals.
© 2013 Fibozachi LLC – www.fibozachi.com. All Rights Reserved.
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1) Open up a new “Scanner” Window
2) Go to “Format Scan”---“Scan Criteria“: (Indicator ! Trader Scanner)
► Select “Squeeze-Play” > 0 (for Field, Operator, and Field/Value)
► Select “Bullish Crossover” > 0 (for Field, Operator, and Field/Value)
► Select “Bearish Crossover” > 0 (for Field, Operator, and Field/Value)
3) Click the (+) to the left of “Trend-Traffic Radar” under the “Field” column. Here
you can change the input settings and select your desired time interval.
*** You must ensure that you enable and enter a value for “Load Additional Data”
in order to allow the scanner to “look back” over the amount of bars that you
defined in “Trend Length”.
© 2013 Fibozachi LLC – www.fibozachi.com. All Rights Reserved.
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1) Open up a new “Scanner” Window
2) Go to “Format Scan”---“Scan Criteria“: (Indicator !Trend-Squeeze Radar)
► For a Bullish Divergence: select “Divergence = 1”
► For a Bearish Divergence: select “Divergence = -1”
► For a Filtered Bullish Divergence: select “Divergence = 2”
► For a Filtered Bearish Divergence: select “Divergence = -2”
► For a 3 Point Bullish Divergence: select “Divergence = 3”
► For a 3 Point Bearish Divergence: select “Divergence = -3”
3) Click the (+) to the left of “Trend-Squeeze Radar” under the “Field” column.
Here you can change the input settings and select your desired time interval.
*** You must ensure that you enable and enter a value for “Load Additional Data”
in order to allow the scanner to “look back” over the amount of bars that you
defined in “Trend Length”.
© 2013 Fibozachi LLC – www.fibozachi.com. All Rights Reserved.
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The Trend-Squeeze™ Oscillator includes our state of the art “Divergence Engine”,
which has the ability to automatically detect any valid bullish or bearish divergence
between the Indicator and Price. When any valid divergence is detected, the indicator
automatically draws a divergence trendline directly onto the chart, alerting you to the
increased likelihood of a price reversal. It also includes fully customizable audio and
visual alerts so that you can be sure of never overlooking valid divergence signals
again.
Our Divergence Engine is unique in that it is truly the most advanced, most
customizable tool of its kind available on the commercial market. Traders can now
take full advantage of the special features that only our Divergence Engine offers:
Turn Divergences & Divergence Alerts On/Off
Show “Filtered Divergences Only” Option
Automatically Draws Divergence Trendlines on Price & Subpanel
Customizable Color-Coding of Bullish & Bearish Divergences
Modify “Divergence Lookback Length”
Modify “Left Pivot Strength” and “Right Pivot Strength” Independently
Calculates Price Pivots using Closing Price or High/Low Price
Detects Long-Term Divergences by Using 3 Pivots
© 2013 Fibozachi LLC – www.fibozachi.com. All Rights Reserved.
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Confused about how divergences work or don’t completely understand the various
features of our Divergence Engine? There is no need to worry ... the following
pages clearly explain and illustrate examples of both Divergences and our own
special ‘Filtered Divergences’ (a trading concept devised by our staff of Chartered
Market Technicians). Read on further to view full explanations of all the different
features and customizable settings within our Divergence Engine, including a
step-by-step overview to help you get started with divergence-based trading.
► What is a Divergence?
Simply put, a divergence occurs when price is in disagreement with the Trend-
Squeeze™ Oscillator. In other words, each are moving in opposite directions. A
bullish or positive divergence occurs when the Oscillator’s value increases while
price decreases. A bearish or negative divergence occurs when the Oscillator’s
value decreases while price increases.
► Why are Divergences Important?
Divergences are a common symptom of an unhealthy market (or stock, etc.).
When an issue is healthy, price and technical indicators (momentum, volume, etc.)
will move in harmony (both are moving up or down). As an issue becomes
overbought or oversold, technical indicators may begin to move in the opposite
direction of price. This results in a divergence, which can serve as an important
warning sign for a trader. It informs you to ‘be on alert’ to the increased likelihood
of a price reversal, retracement or correction. Many swing highs and lows in price
are marked by such divergences, making them effective entry or exit signals.
© 2013 Fibozachi LLC – www.fibozachi.com. All Rights Reserved.
37
A valid bullish divergence is based on the following rules;
1) Two consecutive bottom pivots in the Oscillator.
2) First pivot < Second pivot.
3) Price at first pivot > Price at second pivot.
In simpler terms, the Oscillator’s value has increased while price has decreased.
In the following example, note how the Oscillator is at its lowest value over the last
“3” bars (Default Left Pivot Strength) and then changes direction and moves
higher for “1” bar (Default Right Pivot Strength).
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38
A valid bearish divergence is based on the following rules;
1) Two consecutive top pivots in the Oscillator.
2) First pivot > Second pivot.
3) Price at first pivot < Price at second pivot.
In simpler terms, the Oscillator’s value has decreased while price has increased.
In the following example, note how the Oscillator is at its highest value over the
last “3” bars (Default Left Pivot Strength) and then changes direction and moves
lower for “1” bar (Default Right Pivot Strengths).
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39
A valid “Filtered Bullish Divergence” is based on the following rules;
1) Two simultaneous bottom pivots in both the Oscillator and Price.
2) First pivot’s oscillator value < Second pivot’s oscillator value
3) Price at first pivot > Price at second pivot.
In simpler terms, the Oscillator’s value has increased while Price has decreased.
But what makes it a ‘Filtered Bullish Divergence’ is that each time the Oscillator
made a valid bottom pivot, Price simultaneously made a valid bottom pivot as well.
In the following example, note how both Price and the Oscillator are at their lowest
values over the last “3” bars (Default Left Pivot Strengths) and then change
directions and move higher for “1” bar (Default Right Pivot Strengths), thereby
confirming valid bottom pivots.
The example above uses the setting “Use High/Low for Price Pivots” = True. This
means that the price low is used for determining whether a Price Bottom Pivot is
valid. If “Use Close for Price Pivots” = True, then only the closing price is used for
determining whether a Price Bottom Pivot is valid.
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40
A valid “Filtered Bearish Divergence” is based on the following rules;
1) Two simultaneous top pivots in both the Oscillator and Price.
2) First pivot’s oscillator value > Second pivot’s oscillator value.
3) Price at first pivot < Price at second pivot.
In simpler terms, the Oscillator’s value has decreased while Price has increased.
But what makes it a ‘Filtered Bearish Divergence’ is that each time the Oscillator
made a valid top pivot, Price simultaneously made a valid top pivot as well.
In the following example, note how both Price and the Oscillator are at their
highest values over the last “3” bars (Default Left Pivot Strengths) and then
change directions and move lower for “1” bar (Default Right Pivot Strengths),
thereby confirming valid top pivots.
The example above uses the setting “Use High/Low for Price Pivots” = True. This
means that the price high is used for determining whether a Price Top Pivot is
valid. If “Use Close for Price Pivots” = True, then only the closing price is used for
determining whether a Price Top Pivot is valid.
© 2013 Fibozachi LLC – www.fibozachi.com. All Rights Reserved.
41
- Users can turn on/off the option to show divergences, as well as the
option to issue divergence alerts.
- Activating this feature requires that both the Oscillator and Price plot
simultaneous pivots at both the start and endpoint of each divergence.
- Whenever a divergence meets the user-defined criteria, the divergence
trendline is automatically drawn directly onto the price panel and/or the
indicator subpanel (depends on trading platform).
- Users have the option to change the colors that are used when drawing
the bullish and bearish divergences.
- Users can modify the maximum number of bars that are allowed between
the starting point and endpoint of each divergence.
- Users have the ability to set different values for both the left pivot strength
and the right pivot strength.
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42
- Users can decide if price top pivots and price bottom pivots are calculated
by using the closing price or the high/low prices.
- User has the option to turn on/off divergences that span out over 3
consecutive pivots. When this feature is activated, divergences can be
detected between Pivot 1 and Pivot 2, Pivot 2 and Pivot 3, and Pivot 1
and Pivot 3!
© 2013 Fibozachi LLC – www.fibozachi.com. All Rights Reserved.
43
Show Divergences: This setting determines whether or not to show divergences
between price and the Oscillator. If set to “True”, then all valid divergences will be
calculated, identified, and drawn automatically.
Show “Filtered Divergences Only”: If set to “True”, divergences will only be
plotted after fulfilling the criteria for a “Filtered Divergence”. For a “Filtered
Divergence” to occur, each point in a divergence (start and end) must occur with
simultaneous pivots in both the Oscillator and Price.
Use Divergence Alerts: If set to “True, then all divergences will issue
audio/visual/email alerts just seconds after they are registered and plotted.
Divergence Lookback Length: Determines the “lookback period”, or the
maximum amount of bars between two points/pivots that form a divergence.
For Example: If set to “50”, then the two pivots that form a divergence must occur
within 50 bars of each other.
Left Pivot Strength: The number of bars before the pivot point that must be
higher/lower than the pivot bar’s oscillator value.
For Example: If set to “3”, the value of the Oscillator at the pivot point must be
higher (top pivots) or lower (bottom pivots) than each of the “3” bars preceding it.
Right Pivot Strength: The number of bars after the pivot point that must be
higher/lower than the pivot bar’s oscillator value.
For Example: If set to “3”, the value of the Oscillator at the pivot point must be
higher (top pivots) or lower (bottom pivots) than the “3” bars after it.
© 2013 Fibozachi LLC – www.fibozachi.com. All Rights Reserved.
44
Price Left Pivot Strength: The number of bars before the price pivot point that
must have a price that is > or < than the pivot bar’s closing price.
For Example: If set to “3”, the closing price at the pivot point must be higher (top
pivots) or lower (bottom pivots) than each of the “3” bars preceding it.
Price Right Pivot Strength: The number of bars after the price pivot point that
must have a price that is > or < than the pivot bar’s closing price.
For Example: If set to “3”, the closing price at the pivot point must be higher (top
pivots) or lower (bottom pivots) than the “3” bars after it.
Use HighLow Price Pivots: If set to “False”, then only the closing prices will be
used to calculate price pivots.
For Example: For a top price pivot, the closing price of the pivot bar must be
greater than the previous “3” bars (if left strength is set at “3”) and the next “3”
bars that come after it (if right strength is set at “3”)… vice versa for a bottom pivot.
-- If set to “True”, then the price highs/lows will be used to calculate price pivots.
For Example: For a top price pivot, the price high of the pivot bar must be
greater than the previous “3” bars (if left strength is set at “3”) and the next “3”
bars that come after it (if right strength is set at “3”)… vice versa for a bottom pivot.
Use 3 Point Pivots: If set to “True”, divergences that span out over 3 different
pivots will be detected and plotted. Activating this setting will produce longer-term
divergences, as well as “double divergences”. The explanation is as follows;
Normal divergences only connect Pivot 1 with Pivot 2. However, activating this
setting will connect divergences from Pivot 1 to Pivot 2, Pivot 2 to Pivot 3, and
Pivot 1 to Pivot 3; resulting in longer-term divergences and “double divergences”.
Line Size: Determines the size of the divergence trendlines that are drawn.
© 2013 Fibozachi LLC – www.fibozachi.com. All Rights Reserved.
45
Should you ever have a question about the Trend-Traffic™ Indicator
Package, we are always just an email away at [email protected] to
answer any of your inquiries and provide additional customer support.
© 2013 Fibozachi LLC – www.fibozachi.com. All Rights Reserved.
46
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subsidiaries, affiliates, officers or employees therein. The term “you” refers to the user or customer of
Fibozachi.com. The terms “Content” and “Information” refer to the indicators, tools, strategies,
techniques, systems, manuals, data, communications and any other associated products or material of
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License:
You are purchasing a single user license. You may not: copy, modify, publish, retransmit, participate in
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Information in any way.
Disclaimer:
All Content and Information provided is for educational purposes only. Fibozachi.com and Fibozachi LLC
(the “Company”) is not an investment advisory service, broker-dealer, commodity trading advisor, legal
advisor, tax advisor, or registered investment advisor, and does not purport to tell or suggest which
commodities, currencies or securities customers should buy or sell for themselves. The affiliates,
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You understand and acknowledge that there is a high degree of risk involved in trading commodities,
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It should not be assumed that the indicators, tools, strategies, techniques, systems, manuals, data,
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“Content” and “Information,” presented in its products or services will be profitable or that they will not
result in losses. Past results of any individual trader or trading system published by Company are not
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may not be realized by you. In addition, the articles, blogs, chat, columns, indicators, methods,
strategies, systems, techniques, tools, and all other features of Company's website (collectively, the
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regarding any investment. You should always check with your licensed financial advisor and tax advisor
to determine the suitability of any investment.
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47
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REPRESENT ACTUAL TRADING AND MAY NOT BE IMPACTED BY BROKERAGE AND OTHER
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AS PROTECTIVE STOPS DO NOT PREVENT THE RISK OF GAP OPENINGS OR LOCK-LIMIT
MOVES.
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