Joe DiNapoli is a well-known figure who is treated as a real legend by some traders. This is not a surprise, as he managed to implement the things in trading an average trader can only dream about. His success is based on original application of Fibonacci levels that are called DiNapoli levels.
Before reading the article and writing your questions in comments section, i recommend to watch this video. It’s not long, but covers biggest part of questions on the topic.
A story of this man looks similar to biographies of the most successful traders. Joe got technical education, but took keen interest in economy his whole life long. The first trading experience took place in 1982 and since then, his career was on the up and up.
People who knew him personally and were familiar with his trading strategy emphasize that his trading style features incredible combination of lagging and leading indicators, which gives accurate signals in the end. Joe shares a part of his developments in his books.
As for DiNapoli levels – these are ordinary Fibonacci levels, just Joe has developed several techniques of entry and introduced some new terms. This may confuse the traders who do not know his trading style and consider DiNapoli levels as his personal product.
Key terms and concepts
We’ll apply the levels whenever we want to determine approximate point of correction completion in the uptrend. That is we’ll extend them as the price moves. Thus, we’ll use the following terms:
- range – this term refers to the distance between the beginning and end of the movement, where Fibo levels form. If the price renews high or low after correction completion, the end point should be moved to a new extremum, i.e. in this case, the range increases;
- focus number – this is the level on which the latest price movement correction has started. When the extremum refreshes, a new focus point forms; so there may be several points within the same range;
- reaction – finished correction for the trend movement; there can also be multiple reactions in the range;
- Fibonacci knot– the price, where correction movement will end. DiNapoli recommended to work only with those knots that fall within the range of 38.2%-61.8%. Correction of less than 38.2% is considered too weak and more than 61.8% – too deep, i.e. the trend renewal may not happen;
- target level – the area in which TP can be placed;
- heap – the area with several knots close to each other. I.e. there is a coincidence of correction levels.
Important note! All signals coming from the strategy are valid only in the case when correction levels, as well as heap of support/resistance are within the range of 38.2%-61.8% levels. All other cases can be ignored.
Regular Fibonacci extensions are used for the profit taking levels. In this case, the extension is stretched to the latest correction to place SL on 161.8% and 261.8% levels. Therefore, the use of Fibo levels is almost the same as in the classic version.
If you decide to read the original book of DiNapoli devoted to trade through the levels, you’ll probably be surprised at the number of new terms. It is not entirely clear why there are so many terms, as the new names of already known things confuse the trader. Here is the essence of building the levels, according to the book:
- the quantity of focus numbers will always be equal to the number of ranges on the chart.
- reactions will always be to the left from the focus number they are associated with on the chart. The explanation may seem a bit weird, but the thing is that correction which have formed in the range should be to the left from the focus number (i.e. high/low used for building Fibonacci levels);
- when it comes to the fact that some focus number relates to the reaction, this focus number should be the highest one after the reactions (or after corrections) in the uptrend. For a downtrend, there is an opposite requirement;
- the number of reactions reduces as the timeframe grows. This is natural – if you worked with different timeframes, you’ve probably noticed numerous price movements on a small timeframe, while you can hardly notice them on a higher timeframe due to their insignificance.
Important note! This rule can be used in a reverse order. If there is a zone with a strong resistance/support of the price on the chart, then you can find necessary reactions and ranges by going down to smaller timeframes, as these reactions and ranges may not be visible on the basic timeframe.
Examples of knots, reactions, and focus numbers
Let’s consider a couple of examples as a demonstration of interrelation between reactions and focus numbers. In the first case, we have 3 full ranges on the chart. The first screenshot shows 4 reactions (corrections); thus, the focus point is higher than all local highs, therefore, we believe these reactions relate to the focus point Fs1.
The following range is a downward movement. In this case, Fs1 focus point cannot be point 1 of the next range at the same time, so 1 – Fr range is marked starting with the next correction high, below Fs1. It has reactions too.
The last third range is shown for the case of continued upward movement. In this case, there are 2 possible options:
- if Fs2 focus point is below Fs1 point, then it won’t relate to reactions of the 1st range;
- if Fs2 focus point rewrites Fs1 extremum, then it is automatically associated with all the reactions (upward movement correction) which have been formed before.
But the situation could have followed the other scenario. Imagine the chart went downwards after forming Fs2 point and made a new low which replaced the low set at Fr level. In this case, the setup will change completely.
On the chart, there will be not 3, but only 2 ranges – ascending movement 1, Fs1, and descending movement 1, Fr. This principle should be used for any situation.
If you see a prolonged trend and a series of reactions (corrections) in the market, then the chart will be overloaded with a series of insignificant marks if we perform the analysis in accordance with all the rules. Thus, we won’t need all of them; in particular, most of the knots can be ignored if they do not meet the rules of working with DiNapoli levels.
Let’s imagine we have a strong upward movement with several reactions. At some point of time, correction of the whole upward movement starts and the price rewrites the lows several reactions; in this case, these reactions and their lows can be omitted in the work.
Important note! You should keep in mind that we work with support/resistance falling within the range of 38.2% – 61.8% Fibonacci levels. That is why we exclude the knot on the first reaction level (point 3 in our example).
As a result, we consider only 38.2%, 50.0%, 61.8% levels and the active knot in the range base. This simplifies the task, because instead of 6-7 levels of possible reversal we’ll have to consider only 2-3 levels.
Trading tactics with DiNapoli levels
If you don’t want to bother yourself with details of Joe’s work you can simply learn the tactics of trade with his levels. The book’s essence includes several trading tactics:
- aggressive – 2 entry techniques called “Bonsai” and “Bush”. Their work procedures are the same, only stop loss values differ;
- conservative – entry name – “Minesweeper A” and “Minesweeper B”.
With aggressive technique, it is assumed that the price will surely rebound from 38.2% level of the formed range. The difference between “Bonsai” and “Bush” consists only in the Fibo level after which stop loss will be placed.
According to “Bonsai” technique, the market is entered once the price touches 38.2% level; thus, the stop loss is set at a distance not longer than the next Fibo level, i.e. 50%. The work with “Bush” technique is the same; just the stop loss is located farther than 50% Fibonacci level.
These techniques are basically known to everybody, but tis is a very risky trade, as there is no guarantee of the bounce. After all there are many examples of correction turning into a new trend or the price hanging in a horizontal corridor for a long time. So if you decide to work like this be sure to wait for confirmation of the received signal.
More conservative tactics (“Minesweeper A” and “Minesweeper B”) also suggest entry at the end of correction, but the work is conducted with certain safety measures:
Minesweeper A suggest the work in 2 stages: at first we wait until to the first correction finishes (without entering the market), then we wait for another one correction to form (above or below the first correction) and finally enter the market. Stop loss is set similarly to the previous example – on the next Fibo level;
Minesweeper B includes work on the same principle; just we enter the market not on the second correction, but on the 3rd, 4th, etc. That is we wait for at least two correction movements following the first one.
As a result, we get rare entries; besides, not all trends are long enough to give 3 correction movements in succession that fit the strategy rules (i.e. the end of the pullback in the range of 38.2% – 61.8% levels). On the other hand, we skip bad times when the correction does not turn into a trend continuation.
Example of work according to “Minesweeper A” and “Minesweeper B” methods
The first example shows the case when Fr range point is being rewritten several times when the downtrend starts. In this case, according to the strategy, we skip the first entry point when the price rebounds from 38.2% level and open a trade at the second correction to the downtrend.
In this example, the correction finished within the range of 38.2%-61.8% at both pullbacks, so the situation is almost perfect. As for the trade goal, we used Fibonacci extensions in the second correction to determine the goals. It is clear that both TP levels worked almost perfectly – the price reached 161.8% level and finished the movement at the level of 261.8%.
In the case of the most conservative way of work, we would have to miss at least 2 corrections to the downtrend and enter the market at the third correction if it meets the requirements (falls within the range of 38.2% – 61.8%).
Let’s consider the same situation and work with even more conservative technique. In this case, we’ll wait not for the second correction of the main motion, but at least for the third. In this example, our entry into the market would be also successful; thus, the price has passed all 3 guidelines we could have place TP on, so this trading technique is definitely promising.
Chart marking example
Marking the chart is a tough task even after reading the book. That is why we’ll analyze the basic setups on a specific example.
At first, the chart should be visually divided into areas with pronounced high and low – these are our ranges. In our example,
- uptrend section and peak at Fs point is our first range;
- then there is a descending movement which is considered as another one range, followed by another ascending movement and since Fs high is not rewritten this upward movement can also be considered as a new range;
- then there is another one decline with rewriting the previously set focus point at Fr level. We remove it from the chart. Now we consider descending range as a chart section from Fs high to a new Fr point;
- there is a new upward movement and we get a new range (high is not rewritten);
- thereupon, there is a strong decline; recently set low is rewritten again, so we see a new range on the chart and the previous reactions lose their relevance with the high at Fs point and low at Fr point. Levels we can currently work with are marked with lines.
For convenience, superfluous patterns and inscriptions can be removed from the chart. As a result, the range with the low at Fr point is currently relevant. We see 3 reactions over the entire range, but they are all imperfect and either go beyond 38.2% – 61.8% correction range or simply do not reach it, which happened shortly before the Fr focus point formation.
The same example can be used to show how reactions and ranges become more visible as the timeframe decreases. After switching to H, we clearly see the reaction which was almost unnoticeable at H4.
DiNapoli levels indicator
The traders who can not cope with the manual building of levels (or just don’t want to waste their time on it) can try working with DiNapoli levels indicator. It ensures automatic formation of the relevant levels and marking of the chart.
It is set similarly to all other indicators (by copying the corresponding files to Indicators folder in the root directory). There are many settings affecting mainly the visual component, i.e. line color, their thickness, etc. A trader can change the following settings:
- barn – number of candlesticks to be used for analysis and construction;
- Length – admissible pulse wave length;
- Al – you can turn on sound alerting; the signal will beep once the price reaches the set level;
- targets_Malay – if this option is enabled, then the chart will also include potential levels for placing TP;
- PriceSound – enabling or disabling the sound playback;
- Sound_Play – sound on/off;
Important note! Every trend line can have a special sound alert. So you can enable the sound alert for certain trend lines in the settings.
- LineWidgth and LineColor parameter groups – color and thickness of every line constructed on the chart;
- Ind_Levels – enabling/disabling plotting of Fibonacci extensions on the chart;
- IndBar and DistPips – these settings define the arrangement of trend line inscriptions;
- FExpansColor_levels and Name_FExpans – color and name of Fibonacci levels, respectively.
Once added to the chart, the current marking will be displayed to a trader, but there will be no history of extra plotting. Thus, the trader will have to delete the old lines manually, since the indicator does not have such an option.
After applying to the chart, you’ll see ZigZag indicator dividing the chart into separate waves. As well as Fibo levels applied on the latest range.
The number shows the distance from the current price level to Fibo level; to avoid confusion the numbers and levels are marked with the same color. In our example, there are 31 points for the price to go to reach the level of 61.8%, and 83 points – to reach the level of 100.00%.
DiNapoli levels can be considered as an unusual way of working with the classic levels and Fibonacci extensions. The construction principle remains the same; just Joe has introduced a number of new rules that give a good result on a stable trend.
His levels can be used for trading not only on trend zones. In zones, where conventional Fibo levels would yield nothing but losses, DiNapoli levels can help at least to retain your money and, at fortunate coincidence, even to earn. But it’s worth it.