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Joe
DiNapoli Relies on Advanced Fibonacci Levels
By
Allen Sykora
Joe
DiNapoli uses certain lagging and leading indicators to determine
trade suitability, then Fibonacci support and resistance levels to
select precise points of entry. These points are apparent to him
before they become obvious by the market's price action. He places
his orders on the premise that these levels will hold.
The
approach has not only made him a successful futures and stock trader
but has put him in demand as a seminar speaker around the world. In
fact, he taught his techniques in 23 financial centers around the
globe in 1996 alone.
DiNapoli
is a registered CTA and president of Coast Investment Software,
Inc., based in Sarasota, Fla. His firm provides trading software as
well as instruction and educational materials through the website www.fibtrader.com. He is the author of the book, "Trading with
DiNapoli Levels, the practical application of Fibonacci analysis to
investment markets," and does a limited number of private
tutorials each year.
DiNapoli
uses lagging indicators, such as Displaced Moving Averages, to
determine the general direction of the market--whether it is headed
up or down. Then he uses a specific form of Fibonacci analysis as a
leading indicator to position himself for a trade. He utilizes
calculations made with computer software to arrive at projected
support and resistance points, which is where he will enter a
market.
Suppose
a stock is trading at 130 points. His figures might show him that
strong support lies at say 112. He will put a buy order at that 112
level with the expectation that it will hold, but with a stop loss
to protect himself.
"The
idea is to capture a position if the stock goes down and hits that
level of support, then to grab the profit when that stock moves up
to a pre-calculated profit objective," he said. "It's a
nice way to trade."
He
uses the same basic methodology whether he's trading short term or
long term.
DiNapoli
developed his own trading system through years of research on
lagging indicators and nine patterns that he uses. He did around
four years of research on Displaced Moving Averages in the early
1980s. He found there was limited software at the time, so he
created his own.
"What
really souped up my trading was an experience I had in around
1985," he said. "I knew a trader socially and watched him
trade. I had never seen anything like it in my life--the way he was
nailing highs and lows. Selling at almost the exact right place and
then buying back. He was using a method of Fibonacci analysis, which
was fairly crude compared to what I'm doing now, but was still quite
effective.
"That's
how I got into Fibonacci work.... I had a minimal amount of
instruction, then did a whole lot of research, by day trading the
S&Ps. This part of my research took place around 1985 to 1986.
Since then, I really haven't changed my style of trading
significantly."
DiNapoli
prefers liquid and volatile markets.
"I
like insane markets like Internet stocks," he said.
"Because the less reality there is to a market, and the higher
the participation, the better my methodology will work."
He
relies solely on technical analysis when doing his trading, even if
he does have some fundamental viewpoint--such as the likelihood of
inflation returning to an economy.
"I
might feel inflation has started to come back, but I'm not going to
act to hedge myself in favor of inflation until the technicals come
in," he said. "I may have a lot of thoughts, but I act on
technicals."
One
of DiNapoli's favorite pastimes is travel, which has been aided by
his market background. He has been featured at seminars not
only in North America but Asia, Europe and the Middle East as well.
"I
like different cultures," he said. "Interaction with
people around the world is fascinating."
One
of his favorite hobbies away from work is restoring classic cars,
particularly from the 1950s and 1960s but with an occasional car
from the 1970s. "I like to work with my hands," he said.
He
feels those who have jobs that require them to use a structured
approach, such as a mechanic or a dentist, are best suited to
trading. DiNapoli's original training was in electrical
engineering.
"Give
me a pretty good mechanic and I can probably make a pretty good
trader out of him," he said. "If you have a rocket
scientist who theorizes all the time--boy, that's going to be a
tough nut to crack.
"I've
been teaching people how to trade since 1986. It seems like certain
profiles tend to do well. If people are mechanically based and use
logic patterns, and understand a foundation on which to build a
methodology, with steps and a structure, that makes them better at
futures trading."
DiNapoli
does little after-hours electronic trading, mostly using this to
take profits if he wants to exit a trade.
"Once
you've learned how to make money, you value your spare time,"
he said. "There was a time when the only thing in the world
that was important to me was the next tick of the S&Ps. Thank
goodness, those days are over."
DiNapoli,
whose father was also a trader, made his first trade when he was
only 18 years old. He doesn't remember much about it, other than it
was a long-term stock hold based on fundamentals and he did manage a
modest profit.
"I
was fascinated by the markets and would have devoted myself
full-time at the age of 18, except for the fact that I had to focus
on my education," he said. DiNapoli studied electrical
engineering at Lowell Technological Institute, now affiliated with
the University of Massachusetts.
After
graduating in 1967, DiNapoli went to work as an engineer. "But
90% of the time, I was in the back room of the engineers' office,
trading," he conceded.
There
were some 30 engineers in the office, and many began watching
DiNapoli's trades and making the same ones. They were dealing with
mostly small over-the-counter stocks that sometimes had little
supply, and also some options, where volume was frequently thin
since this was before some of the current options exchanges were
established.
"When
you wanted to go and sell one of these options, you really had to
look around. Bid was by appointment," he said with a laugh.
"It was really a tough situation, but it was a rewarding
experience and I learned a lot. I've been trading ever since."
DiNapoli
trades futures and stocks and will trade on an intra-day basis or
long term. However, he advised less experienced traders to not be
continually changing their time frame, and suggested newcomers to
the market avoid day trading and instead lean toward trades that
last from a few days to a few weeks.
"Short-term
trading is much more difficult, and I don't recommend that as the
place to start," he said. "I also strongly believe that
one of the ways to really make money is to have logical profit
objectives."
These
profit objectives will be smaller on short-term trades than
longer-term trades, continued DiNapoli. Yet, the fixed costs of
trading are roughly the same for both.
"If
you have a fixed cost of trading-whether in futures or a stock-and
the profit objectives are smaller, then your cost as a percentage of
the profit is larger. In other words, it's harder to make money in
short-term trading.
"On
top of that is the emotional cost of dealing with a market as it is
moving. And you have a time cost from not being able to work
anywhere else."
To
help traders who have another job, DiNapoli's company has developed
a product that allows individuals to download information--such as
half-hour, hourly, and daily charts--into a graphics trading package
to allow them to locate the trend and define the patterns he uses.
All that's left to do are the Fibonacci calculations used to enter
and exit markets. "They can do all this market analysis after
the market closes at night, so they can maintain a day job, and not
be pressed emotionally," he explained.
One
of DiNapoli's main bits of advice for beginning traders is to
"not listen to the hype" about the quick profits to be
made, and to plan on spending considerable time educating themselves
about the markets. A starting point would be books on technical
analysis, including some reading on leading indicators, said
DiNapoli.
"It's
like any other career," he said. "It's going to take time
and effort. The worst thing in the world would be to become involved
and make a whole lot of money real soon. Because then they
(beginners) would think they were smart. And if they get that
impression, they're going to lose everything as quickly as they made
it."
DiNapoli
said he frequently tells aspiring traders about the
"five-and-50" rule: Be prepared for an initiation that may
include five years of learning with a cost of up to $50,000 to
cover items such as education, office equipment, software and
potential early losses.
"Some
people get away with three and 30," he said, referring to a
three-year learning track and expenditures of $30,000. "This is
not an easy game, and anybody who thinks it is will find out
otherwise."
What
would he say to somebody who is intimidated at this response?
"I'd
tell them they're smart; they should feel intimidated," he
continued. "Otherwise, they're going to lose a lot of money
before they get good high-quality instructional materials.... There
are a lot of good people out there who can teach you a lot about
trading, but in the end, it's going to be up to you."
Besides
not trying to initially day trade, he advised novices to start with
small sums of money.
"When
they open an account, their (initial) objective should not be to
make money," he said. "Instead, their objective should be
learning and training. They should start off with insignificant
amounts of money, so they're not focused on gains or losses but how
to approach the game.
"It's
like a sailboat. If you want to sail upwind, you don't go upwind;
you go from side to side. That's how you get upwind.
"It
can be tremendously rewarding," he said with conviction,
"once you overcome all of the hurdles."
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