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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