Fibonacci Clusters And Trading The Dow Jones

*Using clusters of fibonacci retracement levels to accurately predict turning points on the global index markets*

In this blog post I will show you how to use fibonacci retracement levels like a professional and take your trading to a new level of accuracy. If you have read most of my previous blog posts you will notice I often use the fibonacci retracement tool to predict reversal price zones and use them to assist me when trading trends. What I haven’t shown you, in great detail, is how I cluster fibonacci retracement levels to further increase the probability of success and improve the accuracy of trade entries.

Let’s start by looking at a picture that I may have used before that shows you what the fibonacci retracement levels are vs a standard bullish price trend.

EURNZD Daily timeframe chart

The basics of applying the fibonacci retracement tool to charts is to find a prevailing trend by looking at the swing highs and swing lows and then use the last high and low to anchor the tool. The chart above has everything you need to know marked on it.

I identify the prevailing trend on the current timeframe by simply looking at the highs and lows. That is it. Higher highs and higher lows means the trend is bullish and the opposite would be bearish. You can also use the alignment of price and EMA’s/MA’s (moving averages) to determine the trend. For example, if price is residing above the 50 ema and has been for a while (see chart above) then this can normally coincide with the trend being bullish. It is also possible to use the alignment of the 50 ema and the 200 ema to determine the trend. If the 50 ema is above the 200 ema then the trend can be considered bullish and if the 50 is below the 200 ema then the trend can be considered bearish. I use the EMA alignment method in my day trading strategy.

Once you have identified a trending market, you can use the fibonacci retracement tool (and other confluences) to identify where the next market swing should occur and this is where an position entry should be considered to therefore be trading with the trend.

The image below shows a simple line chart version of a bullish trend with the swing points for trading with the trend.

Bullish trend with swing points

Using the fibonacci retracement tool on the above trend is very easy. You simply apply it to the last swing high point and swing low point in order to predict the retracement levels for the next pullback. These levels can then be used to find the best areas for a potential long position where there new swing low (higher low) will appear.

For example:

Bullish trend with fibonacci levels

The image above shows the principles behind fibonacci retracement levels in a very basic way and it is not drawn to scale. It does show you how to anchor the 0 & 1 points when trading a bullish trend in order to get the correct retracement levels on the chart. If you are trading a bearish trend then you would place the fib anchor point 1 at the previous swing high (lower high) and the fib anchor point 0 at the previous swing low (lower low).

Fibonacci Clustering:

Clustering fibonacci levels is an advanced technique used by technical analysts to either increase the strength of a potential price reversal area. The idea behind this practice is that as a trend continues and develops, you can use previous anchor points and apply multiple instances of the fibonacci retracement tool to find cluster points of multiple retracement levels that should prove as an even strong reversal zone for price.

Let’s start with a simple example of what I am explaining. I will use the FTSE 100 index on an intraday timeframe to start with.

Example 1: FTSE 100 Index – 4hr timeframe chart

FTSE 100 Index 4 hour timeframe chart
(bullish trend fibonacci clusters pre-trade)

Essentially, you use each swing low of the previous waves as your anchor for the fibonacci retracement tool and then use the most recent swing high as the second anchor for all of the instances of fibonacci retracement tool. Then you look for areas where multiple fibonacci retracement levels cluster and these will be your areas of interest.

Add another confluence to the chart such as a trendline, intraday support/resistance zones or an EMA and you begin to build a bigger picture of where price will likely reverse.

In the example shown above, I have circled the 3 main clusters of fibonacci retracement levels and where they intersect with the bullish trendline. Let’s see how price reacted to these cluster zones.

FTSE 100 Index 4 hour timeframe chart
(bullish trend fibonacci clusters post-trade)

As you can see, price pulled back down to the trendline where it found significant support at the 6988.00 level. This was exactly where the middle cluster of fibonacci retracement levels was sat and once it consolidated for a day or so, price tapped the bullish trendline at this level where it then reversed and continued on its bullish trend.

The fibonacci cluster zone became a good support for price, the swing low (higher low) was formed and then price went on to make new higher highs and reached the cluster of -0.27 fibonacci extension levels that were marked on the chart.

Important: Theoretically, you can use fibonacci clustering on any timeframe with similar results but they aren’t guaranteed. The key to success is using them consistently, learning how to spot trends and apply the fibonacci retracement tool to the swing highs and swing lows. Practice makes perfect.

Example 2: Dow Jones Index – 1hr timeframe chart

Dow Jones Index 1 hour timeframe chart
(bearish trend fibonacci clusters pre-trade)

In the example above, I have decided to show you a short trade set up so you have a practical example of how to place the fibonacci retracement anchor points on a bearish trend. Much like the FTSE 100 example, I have also drawn a bearish trendline across the lower highs and added a clear intraday support/resistance zone which is a good extra confluence.

I have then circled the 2 main fibonacci cluster zones that align with the trendline and/or the intraday support and resistance zone. These are the levels I would look to enter short positions at.

Dow Jones Index 1 hour timeframe chart
(bearish trend fibonacci clusters post-trade)

Once again, price pulled back and almost touched the bearish trendline and intraday support/resistance zone before dropping. A short trade entry on the rejections of the cluster zone at 25250 would have been very profitable with a target profit at the fibonacci extension cluster down at 24500. A nice 750 point drop in price.

Example 3: Dow Jones Index – daily timeframe chart

Dow Jones Index daily timeframe chart
(bullish trend fibonacci clusters pre-trade)

My final example of clustering the fibonacci retracement levels is on the higher daily timeframe chart on the Dow Jones index. This is to show you that if you pick your swing points correctly and use fib clusters in conjunction with other analysis like trendlines, EMA’s etc. then you can theoretically produce good reward:risk ratio trades on any timeframe.

This example is a good one because there is actually only 1 neat cluster off fibonacci retracement levels from all of the swing points used and that aligns with the trendline at around 12600.00. This makes it easier to look for a potential trade set up because you only want to take a trade at that price level.

Dow Jones Index daily timeframe chart
(bullish trend fibonacci clusters post-trade)

Buying the dip at 12600 would have meant you could get in on the bullish trend at a very good rate and trade the next bullish wave up to the new higher highs. Remember, the whole idea of using fibonacci clusters like this is to be able to get into positions with a high probability of success that are trading with the trend.

You want to be buying the higher lows (bullish) or selling the lower highs (bearish).

End Note:

I originally came across the idea of fibonacci clustering in a book written by a female trader called Carolyn Boroden. She is a self proclaimed “fibonacci wizard” but she has been involved in the financial markets a lot longer than I have and the book is packed full of fibonacci trading examples and knowledge surrounding this style of technical analysis.

The book is still sold on Amazon as a paperback and kindle e-book.

Hardcover: https://amzn.to/2ufOx8x

E-book: https://amzn.to/2ZLdLHj

Useful Links:

All my technical analysis is done using the TradingView platform. You can get access via the link below.

https://tradingview.go2cloud.org/SH3bP

My preferred broker of choice is IC Markets. Low spreads and trading costs really help long term profitability. A link to their site is below.

https://www.icmarkets.com/?camp=38537

Thanks for reading and please don’t forget to LIKE, SHARE and FOLLOW my blog to stay up to date with the latest market analysis and trading education posts.

DISCLAIMER: None of the information posted on this site is to be considered investment/financial advice. Trading is high risk and you should only trade with money you can afford to lose.

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