Before entering a trade our trading edge must be present. The A-B-C pattern on the chart must satisfy our trading plan rules to qualify otherwise we pass and wait for the next setup. It is vital that we do not overthink this part of the process and remember that:

“There is a random distribution between wins and losses for any given set of variables that define an edge.” Mark Douglas – Trading in the Zone.

Professional traders have learned to think this way at a subconscious level and are able to act on their edges without reservation or hesitation. All subjectivity is removed since they understand the nature of probabilities and have evolved to the level where they are operating as the casino.

The style of trading we do is not mechanical and therefore we need to objectively identify our edges with discipline and consistency. The FIBCON pattern is the building block of price movement and appears regularly throughout the trading session, often qualifying as our trading edge because it has great structure and great confluence. However, to put probabilities in our favor we must endeavor to ensure we are trading with the bullish or bearish energy (a.k.a. Order-Flow) that is dominant at the time of entering the trade.

So the question becomes, “How do we do this?”

We do this by identifying which phase of the price action cycle price is currently in, i.e. “Spike – Channel – Range”. 

• Spike. When price eventually breaks out of a trading range it is usually accompanied by a strong move up or down due to the buyers or sellers overwhelming each other.
• Channel. When the energy of the Spike begins to dissipate a channel forms.
• Range. The Channel eventually leads to a trading range as buyers and sellers establish what they consider to be ‘expensive‘ or ‘cheap‘ prices and buy or sell accordingly at the new levels.
• Price will remain in the range phase until the pressure builds and a genuine break-out occurs and the cycle repeats itself. 

It is important to point out that this cycle takes place on all time frames and is fractal in nature. This is why it is essential to consider both the higher time frame context and the lower time frame context when trading. See ‘The Energy Of Golden Zones’ for more information.

The Spike phase will typically offer only very brief pullbacks and therefore it is not a phase we typically trade.

The Channel phase will start to produce deeper pullbacks as the energy of the Spike dissipates. These pullbacks often produce FIBCONs allowing us to trade with the energy of the uptrend or downtrend.

The Range phase also produces FIBCONs but we must apply our Trading Range Rules to ensure we are trading with the bullish or bearish energy as price moves up and down the range.

As mentioned earlier, this cycle is fractal in nature, and based on the “Laws of Multiple Time Frames” we must understand which stage a cycle is in with respect to the other time frames. For example, if we are trading an uptrend on the 1-minute or 5-minute time frame we need to know what cycle is in play on the hourly time frame since the laws of multiple time frames state that:

• The higher time frames overrule the lower time frames.
• Prices in the lower time frame structure tend to respect the energy points of the higher time frame structure.

This information supports us in setting profit targets and to expect a shift in the dominant bullish or bearish energy.

We might then decide to look for a specific FIBCON known as a Reversal FIBCON (REVFIB) that allows us to take a trade in the opposite direction. Due to the context of a possible reversal taking place multiple R might be available.