Hi Fibonacci traders,
This week we discover a new method of placing the Fib tool on the chart by using the AO. Last week we showed a straight forward approach to Fibonacci trading by only moving the Fib tool once the target has been hit. This time around we will use the Awesome Oscillator (AO) for the same purpose.
How is an oscillator connected to using the Fibonacci tool? A very sound question but it does make sense!
The Awesome Oscillator (AO) is an indicator at the bottom of the chart. It shows histogram bars which are calculated using 2 different moving averages: one is short-term and the other is long-term.
1) Momentum is rising when the AO bars are rising;
2) Momentum is falling when the AO bars are decreasing.
I use the AO in various ways for determining how to place the Fib tool on the chart.
The AO helps me determine whether I want to place the Fibonacci tool in search for bullish or bearish retracements OR whether I am not interested in using the Fib in the first place.
BULL: strong oscillator bars above the middle point indicate bullish momentum and thus the Fib tool is best used for entering longs upon a corrective bearish retracement. Here I place the Fib from bottom to top and look for a correction back to the Fib levels.
BEAR: strong oscillator bars below the middle point indicate bearish momentum and thus the Fib tool is best used for entering shorts upon a corrective bullish retracement. Here I place the Fib from top to bottom and look for a correction back to the Fib levels.
RANGE: weak oscillator bars around the middle point indicate no direction and thus using Fibs in the first place becomes less desirable.
The AO is also a powerful concept in determining the best swing for placing the Fib tool. Many traders use the Fib tool too frequently and too quickly. The AO keeps traders focused on using the best swing for their Fib purposes.
I place the Fibonacci tool on the top and bottom that matches the start and end point of the AO. The start and end are indicated by the decline and rise of the AO and when the AO has reached a peak plus return to the zero line.
In the below example I place the Fib from top to bottom as the AO made a strong decline. Once the AO starts retracing I can look for a pullback to the Fibonacci level in search of a continuation down lower in line with the bearish momentum.
Do realize that the correction is officially only completed when the AO bars have gone back to the middle line (after a strong push to 1 side). In that case the moment when AO bars cross and re-cross back represent 1 swing high and swing low. Only then is the swing fully completed. Of course 1 swing on the 4 hour chart could be broken down into 5 swings on the hourly chart, which will happen on all time frames.
REMEMBER that using the AO helps determine the correct swing, which helps with placing the Fib tool on the chart. Always look for strong AO bars above or below the 0 line. This helps identify which direction to Fib and on which swing.
Before leaving, make sure to read our entire Fibonacci series!