The practical application of Fibonacci analysis to investment markets.
Book reviewed by Neal Hughes, see profile at the end of the review.
OVERVIEW:
If you want a quick, general discussion on Fibonacci analysis, this book is not for you. In fact, the author takes seven chapters to cover the context for entering a trade, before even getting into Fibonacci techniques. Why? As is often said, Fibonacci techniques work sometimes, and sometimes they don’t. Context according to the author, is a major determinant in making Fibonacci techniques successful. After laying the groundwork, and discussing Fibonacci techniques, Joe DiNapoli details methods and approaches few have thought about much less published. Now I know what’s been missing in the other Fibonacci books I’ve read!
BOOK SUMMARY BY CHAPTER.
INTRODUCTION - SECTION 1
CHAPTER 1:
TRADING METHODS, JUDGMENTAL VS NON-JUDGMENTAL, POSITION VS INTRADAY.
The author begins the book with a refreshing dose of reality. "Although it would be nice if you could live where you want, trade when you want, … and turn a modest amount of money into a mountain pure financial muscle," reality can be a little different. Joe warns that even with access to the best approach available, there is more to it than most of us are led to believe. This honesty is welcome in that we can more clearly understand, and therefore meet, the demands of trading. It is apparent from the first chapter that this book promises to be a practical, real life guide, rather than just another pointer to that elusive pot of gold at the end of a shimmering rainbow.
Joe discusses the aspects of judgmental and nonjudgmental trading, as well as position and day trading, to help you determine the type of investor/trader you inherently are. The value of this is apparent after reading more of the book. Knowing yourself and where you belong is, according to the author, one of the big keys to success.
CHAPTER 2: PREREQUISITES, GROUND RULES AND DEFINITIONS.
Determining trend, direction, movement, and failure, understanding leading indicators, lagging indicators, logical profit objectives, time frame, confirmed and unconfirmed signals, your trading plan, and how to tell whether you are trading well, are the subjects of this chapter. A clear understanding of these aspects is the foundation, which will allow you to apply the lessons in the rest of the book. Don’t be tempted to skip this section. Something as basic as the definition of "trading well" will not have the same meaning to an accomplished trader as it does to the reader. My first thought was that if I’m making a profit, I’m trading well. Not so! As the author says, "If you don’t trade well, you are lost" and he explains why. By this time I realize it is important to carefully consider what Joe is telling me in this book. No assumptions – it’s time to be attentive to fully benefit from the gems provided here.
CHAPTER 3: THE ESSENTIAL COMPONENTS OF A SUCCESSFUL TRADING APPROACH.
Joe introduces the outline of the basic components of a sound trading methodology here, including Market Entry Techniques, Exit Techniques, and Leading Indicators. You might already know that most trading indicators are based on some type of moving average (or averages), smoothed in some way. This makes them lagging indicators. Think about it. Joe shows the reader how to anticipate, not react, and how to close a trade (sell) when most of the "crowd" is buying. If this doesn’t get your attention, slow down and consider how this affects slippage, your real cost of trading!
CONTEXT - SECTION 2
CHAPTER 4: TREND ANALYSIS, USING DISPLACED MOVING AVERAGES(DMA).
Have you noticed that trading with a moving average will cause you to lose a lot of capital due to "whipsaws"? If you try to reduce whipsaws by using a longer (slower) moving average, you reduce profits because you enter your trade later and exit further into the price decline. Displaced Moving Averages help avoid whipsaws, without the disadvantages of using a slower moving average. You’re not left to ponder which DMA to use. The author has researched DMA’s for 3 years, taught about DMA’s for over 11 years and traded with them since the early 80s. Over that time, he has found which DMA’s are most successful. Through a series of questions and answers gleaned from his teaching experiences, he anticipates the problems most readers will encounter in understanding the application of DMA’s. This knowledge alone is worth the price of the book, as anyone who has been the victim of excessive whipsaws will know.
CHAPTER 5
TREND ANALYSIS, USING THE MACD/STOCHASTIC COMBINATION.
Wow! Take notes during this chapter! The author has obviously paid his dues, having been involved in software development for 15 years, and been the victim of improperly programmed "standard indicators" like the common Stochastic. "Will the right Stochastic please stand up!" Joe says. Then he discusses subtleties, like the data sample upon which your indicators are calculated. He even warns you to check on how bars are developed on our charts! Joe is unbelievably candid, and readers should heed his warning. The author is freely critical of software "upgrades" and trading software developed by unmanaged programmers, instead of traders! To quote the book "I’d like to establish an industry-wide standard – when programmers do something (on an upgrade) and don’t tell you about it, that they lose a toenail." We can benefit from the author’s hard-learned lessons, especially because they are presented humorously and with the perspective of substantial experience.
Twenty-five years of trading have taught Joe to use a specific combination of the Stochastic and MACD indicators to determine market trend. This unique approach is detailed in the book. This combination not only indicates when we have a solid trend, it also displays the trading action of our opponents in the market. To quote the book: "I’ve always bought when I get a Stochastic buy signal, how can I now sell?" The answer is: "If you are going to be among the 5% to 10% of winners, you will have to be open to applying methods and procedures which are different from those of the masses". Beware - this is a summary. It is not as simple as that. You need to read the book before you attempt to apply this powerful strategy.
CHAPTER 6 DIRECTIONAL INDICATORS. 9 POWER PATTERNS FOR HIGH PROBABILITY TRADING SIGNALS.
This chapter is really one of the most valuable in the book, even if you never use the Fibonacci techniques covered later. Some authors come up with 9 "hot new" patterns a week. This author has been at it 25 years and has narrowed it down to the 9 most successful patterns. I studied two of the patterns and found that I could make consistently profitable trades with only that information. Not every time, no guarantee of untold riches without risk, but the "Double RePo" is as close as I’ve seen. The other pattern which I found easy to use is the "Bread and Butter Signal", so named because it occurs frequently and although it does not produce guaranteed huge profits, it can put bread and butter on the table if applied correctly and consistently. All of these patterns are completely disclosed, with many chart examples. The explanations also disclose when the pattern has failed, in order to reduce risk.
CHAPTER 7 OVERBOUGHT AND OVERSOLD INDICATORS. WHAT WORKS, WHAT DOESN’T AND WHY.
The author could launch directly into what he has found most beneficial but, as is his practice throughout the book, he spends considerable time discussing the common pitfalls and shortcomings of indicators the public typically uses. Only after that aspect is covered does he explain how oscillators are useful, even in trending markets (contrary to popular belief). Also, since Joe likes high-probability trading, you will learn how to use his oscillators to filter out bad trades, and determine stop-loss placement. "Loss of opportunity is preferable to loss of capital!" is his concept outlined throughout the book.
Overbought and oversold indicators can also help determine logical profit objectives, thereby increasing the number of profitable trades. How often have you seen your profits waste away because you did not take a profit at the right time? Joe closes the chapter by introducing his own indicator, the Oscillator Predictor, a derivative of the Detrended Oscillator. This indicator enables you to determine optimum entry and exit points before you enter a trade.
DINAPOLI LEVELS - SECTION 3
CHAPTER 8 BASIC FIBONACCI ANALYSIS, RETRACEMENT AND OBJECTIVE ANALYSIS.
This is the section I have been waiting for. With characteristic humor, that may disturb some of the mathematical purists among you, the author discusses and simplifies the application of Fibonacci analysis to the markets. It turns out that Fibonacci ratios are excellent at predicting crowd behavior, as well as other interesting and even strange applications. The author shows us the basics of calculating probable future turning points of markets. After reading a few more chapters, I pull out some charts of a few indexes, blue chips, mutual funds, and - HEY – this Fib stuff really works! Not all the time, but often. Now I’m convinced, there’s something to this. Read on, you’ll see what I mean.
CHAPTER 9 DINAPOLI LEVELS INTRODUCTION
This chapter defines terms and underlines cautions. It’s more of the no-nonsense, practical approach, stressing the importance of building a proper foundation.
I have read many books on the numerous ways of applying Fibonacci techniques. This chapter erases all the complicated methods, focusing instead on what Joe DiNapoli has proven to work.
Even so, this is not a high-level scratch-the-surface chapter. Don’t read this chapter late at night while you are falling asleep, The author is explaining the underlying rules for a solid trading methodology that is to follow. The best of these rules are unique to the author’s methods. No other book has them. Joe includes many charts and examples to help you understand how to exactly determine future levels of support and resistance.
CHAPTER 10 DINAPOLI LEVELS
MULTIPLE FOCUS NUMBERS AND MARKET SWINGS.
We are fully launched into advanced Fibonacci techniques here, a bit taxing on the old brain, so slow down and take it carefully. This is powerful stuff! I like the "less is more" part at the end of the chapter, where we learn how to reduce the clutter and focus on the most important turning points. Are you tired of having your stops hit, only to see the market turn around and go where you though it would after you have exited the trade? Do you feel like the "insiders, market-makers, locals and specialists" are "gunning" for your stops. Read this book! There are solid methods revealed to help avoid these problems.
CHAPTER 11 TRADING WITH DINAPOLI LEVELS.
This is where the prior chapters really start to pay off. With the assistance of Hyper Hank, Conservative Carl, and Diligent Dan - humorous, but vitally important characters -the author leads us through some actual trades. We explore different trading styles and experience how these techniques can be applied appropriately. We see how a trader’s psychology can "torpedo" his knowledge and his ability to realize profit.
A valuable software tool call FibNodes is introduced, though it is not necessary for the application of these techniques. This chapter is where we really begin to understand the difference between DiNapoli Levels and the generic Fibonacci techniques as taught in trading text-books. This is especially apparent in the section on hidden D-Levels. This is a real eye-opener!
CHAPTER 12 TYING IT ALL TOGETHER.
"Okay, you’ve studied context, you know whether you want to be long or short. You’ve studied D-Levels so you know how and where to enter (sort of), and you have a pretty good idea of how to go about taking a Logical Profit Objective. It’s time to get a trade on." Joe leads us through a trade, step by step, bar by bar, minute to minute, looking at it from different perspectives. Throughout the book, Joe injects his emotions and his perspective. This not only helps the reader to remain focused, but also gives comfort that you are learning from someone who is a master of the game. There is more to it than picking mathematical turning points. The way these techniques are presented will help you build a "feel" for the market.
CHAPTER 13 FIBONACCI TACTICS, PROTECT YOURSELF AND STILL CATCH THE BIG ONE.
The author explains entry placement techniques more deeply, with a continuing emphasis on trading conservatively. The techniques have numerous chart examples, with defined entry and stop placement rules to reduce or limit your risk. These are advanced concepts, worth the time they take to understand. Don’t try skipping to this section. You will be lost without the foundation covered earlier. Hyper Hank and the other characters continue to educate us and maintain our attention. Joe really works at making what could be a dry and taxing topic, easy and almost fun to follow. You can tell he has been teaching for some years. To quote the book "Which technique is best? What should I use? That’s up to the psychological make-up of each individual trader." Although it is scrupulously organized, it is not a "9 steps to eternal wealth" book. Instead, it caters to many types of traders. You pick the techniques that best suit your trading style.
CHAPTERS 13 THROUGH 15
AVOIDING A TYPICAL MISTAKE. MORE MARKET EXAMPLES.
Did you know that advanced Fibonacci techniques work in real estate markets? You will see how in this chapter, but that’s not all. The author takes us step by step, through market action, exposing us to more of the chart as we move forward. In each case, we are able to build on the techniques we have learned, so we can later apply them to our own real-time charts. Since the basics have been covered, Joe is able to get into the "nuance" of a trade, and explore trade psychology and market mechanics more completely. It is interesting to get a peek into the brain of this trader.
APPENDIX AND REFERENCE SECTION
Finally there is a comprehensive set of appendices, detailed equations, and software setups for the most popular charting programs available. The author doesn’t leave you to solve the implementation of his techniques on you own, he helps you get there!
In the reference section you’ll find contact material for a wide variety of market traders and analysts whom Joe feels have something to offer you.
At $162 this is not an inexpensive book, but after studying it I’ve concluded it would be a lot more expensive to be without it! Trading with DiNapoli Levels is the most valuable book in my collection so far.
What you will learn in this book:
Effective techniques to determine trend direction and when the trend is likely to reverse.
Effective stop placement techniques to avoid being stopped out of a winning trade.
How to:
Enter a trade with the highest probability of profit.
Predict probable market support, resistance, and turning points with profitable accuracy.
Determine the points of least risk and highest probability of success for entering or closing a trade.
Recognize "good markets" and "bad markets".
Improve your overall result by closing a trade at predetermined Logical Profit Objectives.
Close a trade at the best time, when others are clamoring to get into the market.
You’ll also learn:
Why your software could be giving you false signals.
Indicators to monitor how your opponents in the market are positioning themselves.
Powerful predictive patterns which the author has proven profitable over 25 years.
Trading with DiNapoli Levels is written to cater to the perspectives of all trading styles, whether you are a long-term mutual-fund investor, a daily or weekly position speculator, or an intraday tick-by-tick scalper.
ABOUT THE REVIEWER, NEAL HUGHES.
A Technical Analyst, Accountant, Programmer, and Internet Marketing specialist, Neal has parlayed his unique combination of skills into several successful ventures, the most recent one being a software company in the Pacific Northwest. Once a registered broker in Canada and co-author of a technical analysis newsletter, he developed systems and custom trading indicators for charting software. Update July 29, 1998: Since this book review was written, and after taking a private seminar with the author Joe DiNapoli, Neal has continued to study these methodologies and apply them in the markets. The outcome is that Neal is now one of the appointed "experts" on the DiNapoli Client proprietary web pages, where he is willing to help all readers as they apply these techniques in day-to-day trading. Neal can now be reached at [email protected]
