Finding Great Trades with Fibonacci Clusters

This article is a follow up to my prior article Profiting with Fibonacci Lines. If you haven’t read that article, I recommend reading it before proceeding.

What are Fibonacci Clusters?

Fibonacci Clusters are exactly what they sound like, clusters of Fibonacci lines.

Since the market moves in the direction of the preponderance of traders, we get an edge by figuring out which direction the preponderance of traders are going to trade (price clustering). As discussed in the prior article, there are many places from which and to which to draw Fibonacci lines.

When using Fibonacci clusters, you draw the Fibonacci lines from and to all those places and find the prices where the lines coincide – or cluster.

In the image, you can see examples of Fibonacci Clusters on the EUR/USD and how price respected those lines.

Fibonacci Clusters 1
How Can I Profit From Fibonacci Clusters?

In general, you want to find a price where several lines are close together and “draw your line in the sand” just ahead of those lines, anticipating a bounce or retracement from the level.

As we discussed, the 38.2%, 50.0%, 61.8%, 100%, and 127% Fibonacci levels are fairly significant. You can see in the image above that 23.6%, 78.6%, and others above 100% are also significant.

You will want to find an instrument that is approaching a cluster of those levels (and other Fibonacci levels) and place your pending reversal order a few ticks/pips ahead of that line. The more lines that cluster in the same zone, the more likely price will be affected by them.

The Fibonacci Clusters Strategy Plan:

  1. Find a trending market on whatever time frame and instrument you prefer.
  2. Pull 2 to 4 Fibonacci Retracements from various prominent points in the trend. Pull them to the most recent high or low of the market.
  3. Identify the places where the Fibonacci lines cluster.
  4. When the trending market begins to retrace, place pending orders ahead of the Fibonacci clusters locations.
  5. Set your stop loss behind the next Fibonacci clusters location.
  6. Set your target for the beginning (top or bottom) of the retracement.
  7. Close ½ of your position off at the target.
  8. Move your stop loss on the second half of your position to follow price action
  9. Follow stops for the second half of your position.

The Details

Find a market that’s been trending.

Use whatever time frames you prefer. The longer the time frame, the larger the stops and therefore, the small the trade size. But with longer time frames comes more consistency and follow through. I’ve chosen the E-Mini Dow Jones Futures (YM) for this example.

A quick glance at a daily YM chart shows the Dow Jones has been in a solid uptrend since 2009. So, for a longer term trade, we can look for pullbacks in the YM on the 4 hour chart for long entries.

Fibonacci Clusters 2
Take a look at the shorter term time frames for pullbacks to make your entry. In our example, here is the YM 4 hour chart showing several Fibonacci measurements of the up move for a possible long entry. You’ll notice we pulled Fibonacci lines from three prominent fractals up to the current high.

Fibonacci Clusters 3

Now identify clusters of Fibonacci lines for potential trade opportunities. In this next example we have two obvious clusters.

Fibonacci Clusters 4

At this point, you have to decide how to trade this. Each situation is different.

Stop/Loss

On this one, I suggest placing your buy limit entry position about 5 ticks ahead of (above) the upper cluster around 19855 with your stop loss about 5 ticks behind (below) the lower cluster around 19674.

Your initial target can be a complete move back to the top around 20068.

At that point I would close ½ of the position, set the stop to a sensible area behind support/resistance and look for more profit.

I would then move the stop up with price action always staying below the most recent support/resistance level as the trend continues.

Keep doing this until you are taken out by a deeper market pullback.

This image shows the entry, initial target and stop loss and the movement of the stop.

Fibonacci Clusters 5

Had you started with two YM contracts and closed one at the initial target, and followed with the second as described, you could have potentially profited 213 ticks on the first contract and 700 ticks on the second contract over a bit longer than two week period.

At $5 per tick that would be $1065 for the first contract and $3500 for the second contract for a total profit of $4565 with an initial risk of $905 – a 5 to 1 Reward to Risk Ratio. The initial risk would have been moved to zero in about eight trading days.

Final Thoughts on Fibonacci Clusters

Obviously, this may not be the case every time, but Fibonacci Clusters are great at identifying high probability reversals in the market. With proper management, they can be used to find great profitable trading opportunities.

As always, never bet the farm. There is no crystal ball that assures a win. Always find the edge and be sure to maintain your risk parameters. Never risk more than a few percent of your trading account on any trade. Your first job as a trader is to protect your trading account. Without it, you are no longer a trader.

-J

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