Using Fibonacci-based Moving Averages

I received a question today and I wanted to address because it’s yet another great way to use Fibonacci numbers.

I have been using the Fibonacci-based trio of moving averages, my students call it the Raghee Wave or  Raghee’s Cycle Indicator aka the “Wave”, but you can call it a bologna sandwich, doesn’t matter, it’s still just the three 34 period exponential moving averages: one on the high, one on the low, and one on the close.

Why “34″? It’s a Fibonacci number ofcourse.

So here’s the question I received:  “Raghee maam, I have been using your Wave and wonder if you use it as a trailing stop in a trending markets.  Thank you.”

Very good question and very polite email.  I like those.  Folks, politeness counts.  Of the 50-150 emails I get a day, you better believe I answer nice people first.  Thank you for your question Andres, your mother raised you right.

Consider that these three lines of the Raghee Wave (Raghee’s Cycle Indicator) are simply dynamic support and resistance.  I say dynamic because opposed to static or horizontal levels, these levels adjust.  Here’s the key though:  The market must be moving up at 12 to 2 o’clock or down at 4 to 6 o’clock.  In other words it must be a trending market!  So the answer is yes, I do use the Wave as a trailing stop after I have transitioned from my risk based and break even stops.  Trailing stops are the third type of stop I use and the last transition in my trade management plan.

Here are a few examples of the RCI (Raghee’s Cycle Indicator aka the Wave).

Beyond the psychologically relevant 200 SMA, all my moving averages are based on Fibonacci numbers.  Fibonacci is a MATHEMATICAL LAW OF NATURE.

1    2    3    5    8    13    21 34   55    89 144    233   377 610   987   1597 2584    4181    6765

(I have tested this entire series over hundreds of charts and multiple time frames…yeah even the 6765!)

For those of you who are wondering “Can I use these settings on any time frame?” the answer is YES.  I do use the 34 EMA H/L/C, 144, 233, and even the 55, 144, 233, 377, 610, 987, and 1597 EMA on all my time frames.

One last thing about support and resistance as your stop loss.  Make sure you do not put your order AT the support or resistance but instead JUST BEYOND the level.  You want to give price a chance to reverse before hitting your stop.

- Raghee