Fibonacci & Lucas Trading Levels

Fibonacci & Lucas Trading Levels

Varun Aggarwal 15/06/2019 6

The Lucas numbers or Lucas series are an integer sequence named after the mathematician François Édouard Anatole Lucas (1842–91), who studied both that sequence and the closely related Fibonacci numbersLucas numbers and Fibonacci numbers form complementary instances of Lucas sequences.

The French mathematician, Edouard Lucas, who gave the series of numbers 0, 1, 1, 2, 3, 5, 8, 13, .. the name the Fibonacci Numbers, found a similar series occurs often when he was investigating Fibonacci number patterns:

2, 1, 3, 4, 7, 11, 18, ...

The Fibonacci rule of adding the latest two to get the next is kept, but here we start from 2 and 1 (in this order) instead of 0 and 1 for the (ordinary) Fibonacci numbers. The series, called the Lucas Numbers after him, is defined as follows: where we write its members as Ln, for Lucas: Ln = Ln-1 + Ln-2 for n>1, L0 = 2, L1 = 1

The Lucas numbers have lots of properties similar to those of Fibonacci numbers and, the Lucas numbers often occur in various formulae for the Fibonacci Numbers. Also, if you look at many formulae for the Lucas numbers, you will find the Fibonacci series is there too. In fact, for every series formed by adding the latest two values to get the next, and no matter what two positive values we start with we will always end up having terms whose ratio is Phi=1·6180339.. eventually! Like for example, Lucas 199/123 = 1.618 similarly Fibonacci 89/55 = 1.618 and this pattern continues.

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If you refer to above table, it highlights Fibonacci and Lucas Series which are known series to Mathematicians. But what I found was some interesting correlation of Lucas and Fibonacci while trading options. Most traders in stock market focuses on Fibonacci Trading Levels. Lucas is completely unheard concept in trading. Moreover, I researched deeper & try finding out if we can make something really interesting out of this series. So I looked at the difference between Lucas Series & Fibonacci Series. And also computed the average of three i.e., Fibonacci, Lucas & Difference.

Methodology to Trade :

1) Identification : Focus on the nearest numbers on the sheet i.e., Fibonacci, Lucas, Difference, Average.

2) Entry Strategy : The level below or above the current option price is the trigger point to buy or sell the option. If any price above the next level of Fibonacci, Lucas, Difference and Average breaches on upside, it will trigger buy and vice-versa. Suppose an option is trading at ₹38, so Fibonacci level support is ₹34 and Lucas-Fibonacci difference Level resistance is ₹42. If you have to buy the option, it is above ₹42 for a target of Lucas Level of ₹47 & so on for next nearest levels i.e., ₹50.67, ₹55, ₹68, etc or even if you buy at support of ₹34, your SL (Stop-Loss) should be just below the average price on the sheet i.e., ₹31.33. Ideally best SL would be between ₹29-31. As 29 is another Lucas support level.

3) Exit Strategy : Suppose you buy the option at ₹34 fibonacci level and it keeps going up and went upto ₹325 and starts falling after that. So your exit SL level should be ₹288. If you look at the sheet above, immediate Lucas level is ₹322. Hence, next nearest lower level is ₹288 which is the difference level. So precise SL would be N-1 i.e., 288-1 = ₹287. Note, with every level surpassing, previous level becomes the SL level.

Let me illustrate how you can practically trade options intraday or positional using this methodology using some live examples :

1) BUY Example : Bajaj Finance 3500 Strike Put Option for June, 2019 Expiry

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If you check the opening price of Bajaj Finance Put option, it is ₹41.85 which is less than ₹42. Now what is 42??? It is Lucas level if you check the series. Option Price failed to cross the Lucas Level on opening. Hence, if someone has to buy the option, it will find its next support at ₹34 which is Fibonacci number & also the nearest number.

As a trader, you will buy this Put option at ₹34-35 with SL of ₹29 or ₹31 for immediate target of ₹42,47,55 & so on. So as option moved above ₹55, your immediate SL was ₹46 i.e, 47-1.You can either keep the option for next trading day with the SL or square off intraday at ₹55-56 LTP.

Note, it gave good reward ₹21*250 = ₹5250 Profit.

2) Buy Example : IBULHSGFIN 660 Put option for June, 2019 Expiry

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The opening price of Put was ₹13.05 and ₹13 is Fibonacci support level. This option is buy candidate with SL below the average price of ₹12 in the sheet i.e., ₹11 with immediate targets of ₹16-18-19.3-21-26-29. What is more interesting fact here is option finding resistance as it approached ₹31.33 average price. A trader traded on the above would have made good ₹29-13 = 16*500 = ₹8000 gains intraday with small risk of ₹2 i.e., ₹1000 only. Risk Rewards of 1:8.

3) Sell Example : Hero Moto 2700 Call option for June, 2019

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The opening price of call was ₹62 & below ₹55, it will trigger sell as i.e., the next immediate Fibonacci number on the sheet. So if you place a sell order(Stop Loss SELL Order as price was above ₹55) at ₹54, it met its target on downside with ease as immediate targets was ₹50.7, 47, 42, 34. SL for this trade would have been ₹68-69 as i.e., the difference level on the sheet. Gain of ₹54-34 = 20*200 = ₹4000.

4) Sell Example : NIFTY 11700 Strike Call Option June, 2019

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Call opening price was ₹239.40. It made a high of ₹251 but could cross even ₹288 difference level of Fibonacci and Lucas. It triggered a sell below ₹233 with SL of ₹288-289 for a target of ₹215, 199, 178 & so on. As a trader you need to place stop sell order at ₹232. Intraday gain ₹232-178 = ₹54*75 = 4050.

5) Buy Example : Weekly Bank Nifty Put Option June 20th Expiry, 2019

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This example will illustrate how easy trading can be with Lucas-Fibonacci approach. If you check the opening price of BN 30600 PE, it was ₹110 which is also difference level as per sheet.

As a trader, the trade is simple. Buy at ₹110 or above ₹123, with the SL of ₹89 which your next nearest level and also Fibonacci Level. Note, if you consider to buy at ₹123-124 (Place buy SL order as initial market price is below 123). Buying above ₹123 is giving confirmation on price. Immediate upside targets are ₹132.6-144-178-199-214.6-233-288 & so on.

Exit on this option was triggered intraday at ₹287-288 as option price faced resistance at ₹322 lucas level and reversed to last trade at ₹260. Hence, intraday gain of ₹288-132.6 = ₹155.4*20 = ₹3108. Low risk-high reward as a trader.

I hope I could inspire you towards trading options in better way. Having a systematic approach to trading is always better than trading randomly and gambling on capital. If you liked the analysis, do spare 2 minutes and post an honest feedback. I will appreciate it.

Your feedback is important, please don't forget to share your opinion.

Please note : I could be wrong in my analysis and there could be many other challenges in live market while trading. Do your own research and analysis. This is more for educational purpose only. Trading Derivatives is risky and losing capital is highly possible.

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  • Tess Antoniazzi

    Short, sweet and easy to understand!

  • Rachel Elizabeth

    Conceptual, demonstrative and to the point, contains every thing

  • Phil Rothera

    Nicely done! Good strategies

  • Jonathan Blakeley

    Very easy to understand

  • Thomas Jensen

    Simply great and easily understandable...Thanks

  • Brandon Howell

    Effective demonstration !

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Varun Aggarwal

Finance Guru

Varun is the director of Profit Idea. He is a multi-skilled experienced professional in academics, corporate and administration fields. He has over 8 years of corporate training experience in the field of finance & provides training for CFA, MBA, Stock Market (Derivatives, Fundamental & Technical Analysis) & various other financial subjects. He is also associated with various institutes, boards & banks. Varun holds financial and investment qualifications from Delhi University, Yale University, London Business School, Indian School of Business, Columbia University and IESE Business School.

   

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