How to Draw Daily Fibs for Scalping
Hello traders, and welcome to the scalping course and the second module. Getting started: The backbone of a scalper. In this module, we’re going to teach you everything you need to know, or everything you must know in order to start your career as a scalper, and in this course we are going to teach you what the daily Fibs are, how to draw them, how to use them, and why they are so important when it comes to scalping the markets at very volatile hours.
Now let’s start by introducing what the daily Fibs are. The daily Fibs are the Fibonacci levels that only work on a daily range and on one session at a time. This means that every time we sit in front of our computers we are going to draw them. In every single session, the daily Fibs are going to be different so the Fibs that we are going to use today are not the same that we are going to use tomorrow and so on. Our daily range is calculated from the height of the session to the low of the session. This means that we need a trending market and we need a trending market because these daily Fibs are going to give us great entry points on a pullback to get on the move that is currently happening. Now, these Fibonacci levels are going to give us great areas of support and resistance throughout our session. This means that because we are scalping, we are not looking for longer term moves. This means also that these Fibonacci are going to give us great entries and great areas of profit taking. Of course, these Fibonacci levels can be tested throughout the entire session. What I’m trying to tell you here is that these Fibs are going to be useful, not in just one setup, but they can be retested and they can give us help all throughout the session. And why are daily Fibs important? Well, when scalping, we are going to look for markets that are moving, or trending markets, and pullbacks to get into the trend. We are going to use daily Fibs to spot areas that price might reject for us to enter the market. And these Fibonacci levels are going to give us, in conjunction with other instruments that you are going to learn here in this course, great risk to reward scenarios.
Now remember that when we are scalping, we are looking for the best risk to reward scenarios because our profit taking levels are going to be somewhat small or smaller than, if you are medium trend trading or [inaudible 00:02:43] trading, and of course we are going to get in and out of the market many times during the session, which also means that we needs to lower our exposure every time we get in the market. Now let’s go through the charts and I am going to teach you how to draw them on the trending market and I’m going to spot some areas that these Fibs gave, or were tested and gave great trades during the past session.
Hello traders, we are back and this is the five minute YM chart. YM is the E-mini Dow futures contract and as you can see here we have last Friday’s session on our charts. The first thing we are going to do is we’re going to look for the market direction. As you can see, the market direction is down because we are making lower highs and lower lows, okay? This is the first flush of the session and you can see the dates here. The date starts right here at 12 a.m. Central time and we have the first high of the day here at around 2:20 a.m., and we have the low of the session right here at around 8:20 a.m.. So what we’re going to do is we’re going to grab our Fibonacci tool, our Fibonacci retracement tool, and we’re going to draw the Fibonaccis from the high to the low. The reason we are going to draw this from the high of the session to the low of the session is because we are in a down-trending market. If we were in an up-trending market, we would draw it from the low to the high. Of course, you need to already know this. If you don’t know how to draw Fibonacci levels, you can go through our technical analysis course, but it’s very simple. If you are in a down-trending market, you are expecting a pullback to the upside, so we are going to draw the Fibonacci levels from the high of the session to the low of the session.
Now, I’m going to change these parameters of the Fibonacci levels so I have all my levels to the right. You can see that after the flush we made a small retracement and then we made a lower low, which means that this is not the low of the session, but this is the low of the session. You can see right here that we have one pullback at the 50th Fibonacci level and we have another one at the 61-8 and that the 76-4 Fibonacci levels. We are going to use the default Fibonacci levels, which are the 23-6, the 38-2, the 50, the 61-8, the 76-40. Then we can also use the 88-6, which is around this level right here. But because we are just scalping the market, our retracement is bigger or our retracement is deeper than the 76-4 will tell us that this pullback might not be in fact a pullback and the entire structure might not hold down.
So the first thing we are going to look at is this area at the 50, so let me just point it out for you with the rectangle tool, which is right here. You can see that we tested it once and then we pulled back. Now I know that in the five-minute charts, it looks kind of choppy, but remember that this is just the first step of becoming a scalper so what we are looking at here are just the Fib levels and how price reacts to these Fib levels. Further in the course we are going to teach you how to use different charts to have a better view of the market and we are going to use range bars, we are going to use the one-minute chart, and we are going to also use tick-charts, but for this lesson we are going to stay with the five-minute chart and I’m going to teach you what could have happened here on these pullbacks.
Now the first pullback is this one right here, and you can see that price just came onto the 50 Fibonacci level and the pulled back. So in this instance we could have made 26 ticks on the Dow, and remember that one tick is one dollar on the YM and the better setup is this one right here when price comes all the way to the 50 Fibonacci level and then makes this candlestick formation which is called an Evening Star. This candlestick formation right here tells us that this price level along with this Fibonacci level, and of course these lows right here, have been rejected and we have a setup to go short. You can see right here that we hit the previous lows which would have made we would have made another 28 ticks, okay? A very nice risk to reward ratio.
Now price comes here and finds support and then jumps right into the 61-8. We have two candles that reject the 61-8 and one candle that hits the 76-4. When this candlestick hits the 76-4, we have another setup to go short. Even though the next scandal comes and makes a new high, our stops would have been higher than this high which would have meant that we would not have been stopped out the trade. So we would have made on this trade another 40 ticks. Of course we can go all the way down to these lows for a nice 63 tick win. This is basically how you are going to be using the Fibonacci levels. Right here, again, we have another setup at the 76-4 and with the target aiming to the previous lows again, we would have made another 63 ticks on this trade. Then price jumps closest above the 76-4, and the next candle is a red candle that also closes above the 76-4, meaning that our daily Fibonacci levels have been compromised and as you can see even though we come all the way down here, the market starts to chop before continuing higher. I think that this means that that price is going to try to test these highs which would mean our daily Fibonacci levels have been compromised and are no longer useful to us. This is crucial.
On the first module, Introduction to Scalping, we taught you that you should always be trading in the London and the New York session overlap. Here are all the setups that occur during that time. After the London and the New York overlap, you can see the market just starts to chop and starts to go higher. So this is the time where price is actually… well it is volatile, but it’s actually easier to predict. Remember that when you are scalping, you are just reacting to levels, you are not trying to predict where price is going because you are not going to take longer term positions, you are just reacting to the levels. Just like this one right here, we hit the 50 Fibonacci level and we got a nice rejection candle at the previous areas of support now being tested as resistance and we’ve got two setups on the same Fibonacci level. And right here when price hit the 76-4, we got another two setups to go short. This is basically how you are going to be using the daily Fibonacci levels, and of course we are going to teach you how to use that with other indicators and other techniques so you can build an entire scalping system.