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The Fibonacci Rainbow

  • #1
  • First Post: Sep 12, 2006 2:22am Sep 12, 2006 2:22am
I want to share with you guys my new strategy and see if you could possibly help me improve it.

Before I start explaining this system I want to say thank you to everyone here. I am constantly amazed by the cooperation and teamwork that I see in nearly every thread here. It is just awesome to see so many people sharing their thoughts and experiences (both good and bad) in an attempt to better their own and each others trading experiences.

Now to the system......

I have been reading many of the systems on this board and have even tried a couple of them on my live mini account for fun. None of them has really seemed to fit my trading style. But they each seem to have a piece or two that I really like.

I found this system while reading How Technical Analysis Works by Bruce M. Kamich. In his book he calls it "The 3-Moving-Averages System". It is a simple system, which I really need with a fulltime job in IT and a two year old son.

While I am not the first to come up with this idea, I did decide that it could use a better name, so I am calling it "The Fibonacci Rainbow".

The basics of the system go like this...

Setup:<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" /><o></o>

Place three moving averages on the 1 Hour chart of your choice.

I am not a huge expert in moving averages but the Exponential Moving Average (EMA) seems to give the truest indication of the price action on the underlying instrument. So for now I am using EMA's.

While the combinations of numbers you could use for the EMA's are limitless he does mention using one of these three groups of numbers.

  1. Cycle Lengths
  2. Harmonic Numbers
  3. Fibonacci Numbers

<o></o>
I personally like the Fibonacci numbers so I am going with those.

  1. EMA #1 uses the Fibonacci number 8 and is colored yellow
  2. EMA #2 uses the Fibonacci number 13 and is colored orange
  3. EMA #3 uses the Fibonacci number 21 and is colored red

<o></o>
When you lay these out on a chart they will look like a rainbow thus the name

“The Fibonacci Rainbow”

Entry Signal:<o></o>

The entry signal for “The Fibonacci Rainbow” is very simple.

Go long – When EMA#1 > EMA#2 > EMA#3
http://kivasolutions.com/images/fibo...0go%20long.gif
<o></o>

<o></o>

Go short – When EMA#1 < EMA#2 < EMA#3
http://kivasolutions.com/images/fibo...go%20short.gif
<o></o>

<o></o>

Exit Signal:<o></o>

<o></o>
The exit signal is also very easy using this method. Instead of waiting for the longer cross back, you exit your trade when EMA#1 crosses back over EMA#2. This will get you out of a reversal trend a bit earlier than waiting for the cross to the slowest EMA.
<o></o>

Sample exit signal
http://kivasolutions.com/images/fibo...it%20point.gif

Reentry Signal:<o></o>


With this method there will be times during a major move in one direction that the exit signal will be triggered but a reversal signal has not yet been given. Watch for EMA#1 to cross back over again and continue with the trend. As soon as EMA#1 double crosses back out you can resume your trade. If you stay out of the trade it is quite possible that you could miss quite a few pips.
<o></o>

Closing:<o></o>


Looking over the past few months of charts using these rules I have seen several large moves that would have netted 100+ pips at a time with minimal whipsaws. I am fairly inexperienced with other types of indicators so maybe one of you guys has a suggestion of one that could help cutout the few whipsaws.
<o></o>

Any extra ideas would be appreciated, as I need to start saving for my son’s college…

Thank you,

Tim (a.k.a. altapowder)

  • #2
  • Sep 12, 2006 2:58am Sep 12, 2006 2:58am
Hi Tim,

As you said, this is nothing new, but it will be a good experience for you to trade this. You will learn a lot from it. May I suggest you do it on demo, and save your money until you've developed the system to meet your style?

The idea of taking bits of other systems and combining them into something that feels right to you is a good one. Early on, I had trouble trading until did this very thing.

You are doing well to start simply. Please resist the urge to start adding numerous indicators would be my suggestion.

To help a bit with the whipsaws, you might want to consider entering and exiting your trades when the 8 EMA changes slope rather than waiting for a cross.

And finally, find the trend on a higher time frame and only take trades in the direction of the trend.

I believe you will find that this will not be the system you end up making your own, but it will be an educational experience for you. Just don't make it an expensive education....DEMO IT!!

Hopefully, others can offer additional constructive suggestions as your process of discovery develops.

Take care

Dial
sxaxlxvxaxtxixoxnxbxyxgxrxaxcxexdxoxtxoxrxgx
  • #3
  • Sep 12, 2006 7:59am Sep 12, 2006 7:59am
Tim,

When evaluating potential systems I have found that you can often save yourself a lot of time by going straight to the scenarios where the system won't do well. If you can survive that period of drawdown then it warrants further investigation. Using this system as an example, I would go straight to a period of market chop (you won't have to look too hard) and test the system there. Be honest with yourself because the market won't overlook your biases. If a moving average crossover system can pass the choppy market test or can be modified to do so then you might have something worth pursuing.

Phil
  • #4
  • Sep 12, 2006 8:30am Sep 12, 2006 8:30am
If I were you Tim, and I'm not, I would backtest this strategy for a years period or more. With a 1 hour chart, you could possible have a couple trades a day during ranging conditions, so I think a year would be sufficient. If you can post (or not post, doesn't really matter) a spreadsheet with every trade that would be taken in this period of time, including spread, I would say you will have a very good understanding of how the system will perform in the long haul.

I know you're in IT and have a son; however, expect to spend A LOT of time backtesting. Please, don't trade a system until you have hundreds of trades on 'paper'. I've spent countless hours backtesting systems with indicators, only to laugh at them at the end of the day.
  • #5
  • Sep 12, 2006 8:38am Sep 12, 2006 8:38am
Quoting altapowder

<o></o>

Any extra ideas would be appreciated, as I need to start saving for my son’s college…




If you need to save for your sons college put a portion of your income into a savings account and keep it out of the forex market until you are 100% positive of your system and that its profitable...which could be never




Only trade with money you can afford to loose at the start or you may find yourself putting someones else's kids through college :



Other than that I like the simplicity of the system. And it seems you have a good grasp on it, so do the back testing, start testing it in demo mode and see if you can handle it and then you'll be ready! Ta da!! I wish you lots of good trades with it.
  • #6
  • Sep 12, 2006 10:53am Sep 12, 2006 10:53am
Quoting philmcgrew
Tim,

When evaluating potential systems I have found that you can often save yourself a lot of time by going straight to the scenarios where the system won't do well. If you can survive that period of drawdown then it warrants further investigation. Using this system as an example, I would go straight to a period of market chop (you won't have to look too hard) and test the system there. Be honest with yourself because the market won't overlook your biases. If a moving average crossover system can pass the choppy market test or can be modified to do so then you might have something worth pursuing.

Phil
Great advice Phil!
sxaxlxvxaxtxixoxnxbxyxgxrxaxcxexdxoxtxoxrxgx
  • #7
  • Sep 12, 2006 10:59am Sep 12, 2006 10:59am
I found these type of systems look good on paper but are subject to many whipsaws which eat up any profit that you had made in the past.

You can try using any other indicator as a filter. Try adding MACD and if momentum is down and you have a cross down, enter it but if momentum is up don't enter.
  • #8
  • Sep 12, 2006 2:04pm Sep 12, 2006 2:04pm
Quoting diallist

To help a bit with the whipsaws, you might want to consider entering and exiting your trades when the 8 EMA changes slope rather than waiting for a cross.

And finally, find the trend on a higher time frame and only take trades in the direction of the trend.
Both of these are good ideas.

I will look into exiting when the slope changes instead of waiting for the first cross. Do you know if a slope change can be scripted in an EA as an event?

I definately like the idea of only entering a trade in the direction of the larger trend. This is one of the pieces of the "Vegas 4 Hour" method that I want to use. This in its self should cut out half of the whipsaws.

Thank you very much for the advise.
  • #9
  • Sep 12, 2006 2:28pm Sep 12, 2006 2:28pm
Quoting Money Talks
If you need to save for your sons college put a portion of your income into a savings account and keep it out of the forex market until you are 100% positive of your system and that its profitable...which could be never

Only trade with money you can afford to loose at the start or you may find yourself putting someones else's kids through college :
Thanks for the money management advice. I actually do invest quite a bit of my income in much less volitile instruments. I stick 15% of every paycheck into savings of one sort or another.

I put 10% into a moderately-agressive international mutual fund and 5% into a 529 (tax-free) college savings plan for my son. I also have a state sponsered retirement program that I am a part of through the State of California. It all seems to be stacking up fairly quickly.

For testing various forex methods I actually have opened a small ($250) account and trade extremely small lot sizes. I am not too worried if I loose my $250 I just want to test this under real circumstances.

I do do some backtesting using different methods but feel I will not get a real taste unless I am trading with real money. For now I do $0.01 a pip.

I was playing online poker for awhile and was loosing my arse, so I decided to try this as a hobby instead. This is much more fun anyway.
  • #10
  • Sep 12, 2006 6:17pm Sep 12, 2006 6:17pm
Marge: Homer, the plant called. They said if you don't show up tomorrow don't bother showing up on Monday.
<!-- / sig --><!-- controls --> Homer: Woo-hoo. Four-day weekend!!!



  • #11
  • Sep 12, 2006 10:00pm Sep 12, 2006 10:00pm
Quoting diallist

And finally, find the trend on a higher time frame and only take trades in the direction of the trend.
Why is it that you choose a higher level time frame to determine trend instead of a lower one? Since all trends have to start at the lower levels it would seem that you would be getting a more accurate indication of movement by starting there. Then move up to your current time frame. Anything beyond that is historical data which doesn't change until long after the fact.

Can you provide any further info as to why longer time frames are used?

Thanks,

Jason
  • #12
  • Sep 12, 2006 10:33pm Sep 12, 2006 10:33pm
Quoting jlowder
Why is it that you choose a higher level time frame to determine trend instead of a lower one? Since all trends have to start at the lower levels it would seem that you would be getting a more accurate indication of movement by starting there. Then move up to your current time frame. Anything beyond that is historical data which doesn't change until long after the fact.

Can you provide any further info as to why longer time frames are used?

Thanks,

Jason
The idea is the same as in the Vegas 4 hour method. In his method he will not take a long position on the 4 Hour chart unless there is an uptrend in progress on the weekly chart and vice versa for short positions. Read section three of the attached file.
Attached File(s)
File Type: pdf 4HrTunnelMethod.pdf   98 KB | 1,149 downloads
  • #13
  • Sep 13, 2006 8:10am Sep 13, 2006 8:10am
Quoting altapowder
The idea is the same as in the Vegas 4 hour method. In his method he will not take a long position on the 4 Hour chart unless there is an uptrend in progress on the weekly chart and vice versa for short positions. Read section three of the attached file.
Thanks. Yeah, I've read that, but I'm trying to understand why. So why not the daily instead of the weekly? It would seem that the weekly is so outdated that it could be completely opposite of what the actual trend is. Thats why I'm trying to figure out the use of the larger time frames, as trends start with the lower ones.

Jason
  • #14
  • Sep 13, 2006 11:47am Sep 13, 2006 11:47am
Quoting jlowder
Thanks. Yeah, I've read that, but I'm trying to understand why. So why not the daily instead of the weekly? It would seem that the weekly is so outdated that it could be completely opposite of what the actual trend is. Thats why I'm trying to figure out the use of the larger time frames, as trends start with the lower ones.

Jason
The trend might start with the smaller timeframe, but the odds are in your favor that a smaller trend will succeed when a matching trend is in progress on a larger time frame. When the two timeframes are trending in opposite directions then the smaller trend is most likely a whipsaw.

That is my interpretation of what Vegas means in his article.
  • #15
  • Sep 15, 2006 9:14pm Sep 15, 2006 9:14pm
Thank you all for your advice. I have decided to end my test of this system. While I think it would be profitable I think I have found something similar that is more developed in the james group threads.

Thank you to those of you that offered your advice.
  • #16
  • Oct 2, 2011 3:47pm Oct 2, 2011 3:47pm
hello,i´m a brand new user of meta trader. i like the rainbows. and i also thougt about fibonacci. but i think with fibonacci, there not enoug emas.

so think, what is withe the golden cut? or phi?

do you think about this version of rainbow charting?
  • #17
  • Oct 4, 2011 8:13am Oct 4, 2011 8:13am
hello togehter. youre fibonacci rainbow inspired me. so i thougt about, to build up a harmonic fibonacci:

here we go on. the fibonummers


8


13


21


34


55


89 (Center Line)

this were the normal fibonacci without clusters, not very much lines. now we fill the room between 8 and 13 also with lines.

exactly i a harmonic relation to fibonacci. here again:


8
difference is 5

is incluedes 2 and 3

13
difference is 8

is incluedes 3 and 5

21
difference is 13

is incluedes 5 and 8
34
differcne is 21

is incluedes 8 and 13

55

difference is 34
is incluedes 13 and 21

89 (Center Line)

now we adide the harmonic fibonacci numbers to new rainbow numbers:

8
10
11
13
16
18
21
26
29
34
42
47
55
68
76
89

so and for good looking, every part of the rain bow getting harmonic RGB Colours.

what do you think, about new fibonacci rain bow?
  • #18
  • Last Post: Edited Oct 30, 2011 10:18am Oct 29, 2011 4:04pm | Edited Oct 30, 2011 10:18am
Hi,

see apply SMA of values given below for different time frame

for 1 Hr - 8,13,21,34,55,89
30 M - 16,26,42,68,110,178
15 M - 32,52,82,136,220,356
5 M - 96,156,246,408,660,1038

You will get perfect support and resistance levels
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