3 Other Applications of the Fibonacci Retracements and Expansions 27 4 Charts and Difficulties: A Historical Perspective 41 5 Common Mistakes in the Application of Fibonacci Retracements. This book explores the application of two of the more 'obscure' techniques: Fibonacci applications and Gann theory. Finally, to the stars and giants of the future, this book is addressed to you.
Introduction to and History of the Fibonacci Sequence
Starting with a square with side unit equal to 1, one of the sides is extended so that the ratio of the new line to the old side of the square is in the golden mean, i.e. again lengthens the side of this square so that the new length is equal to the original square, i.e. the natural occurrence of the Fibonacci ratio is most famously seen in the development chambers of the nautilus shell.
Application to Financial Market Analysis
The previous chapter described the derivation of the Fibonacci sequence, the Fibonacci ratio and the Fibonacci number. These add to the effectiveness of the Fibonacci retracement system and help improve confidence in the underlying movement. Once the price action has recovered in the direction of the primary move, extension levels can be seen in the.
Other Applications of the Fibonacci Retracements
It is important for the analyst to be aware of the dynamics of the group of participants within the market. If so, then the effectiveness and indeed the usefulness of the fanline is. It is not often easy to see that the radius of the arc has changed unless it is a significant movement.
Charting and Difficulties: A Historical Perspective
A change in the coupon meant the ability to rebase the historical data back to the start of the contract's life. In 1994 I had the honor of being elected to the board of the Society of Technical Analysts in the UK. It is an advantage for the analyst to have as much data on the display as possible.
Common Errors in Application of Fibonacci Retracements
In this particular case, the intermediate move is of greater importance for the development of the correction and is given better target levels. However, its use in corrective moves is valuable, as demonstrated above, and can be seen in the following example of the correction in the FTSE-100 futures contract. Analysts should be aware of the wide bearish channel that is also developing on this chart.
The dominant pattern is still the bearish channel on the daily chart and that sees support of the channel near the expansion level region. It is interesting to note that the 61.8% change of the small Fibonacci retracement pattern corresponds to 50% of the much larger one. Current action is on the 38.2% retracement of the larger move, but a breakout on the 100% retracement of the smaller move is favored.
This may leave a heavy weight on the analysis, but since the break of the big 61.8% Fibonacci retracement did not develop, there is an argument to state that the effect of this big pattern is fading. This is one of the problems with Fibonacci retracement levels: failure to break through the retracement levels is usually caused by other technical reasons, mostly overstocking. There is none obvious on this chart and that is one of the issues surrounding a successful breakout at the 50% level.
This has put the reigns on the downtrend and taken away some of the momentum.
Application and Common Errors in Fibonacci Fanlines
A fan line is constructed with this level as the extreme, and the origin of the pattern is placed at the March 2002 low of 97.50. The price action is now moving well away from its origin at the December low and the effectiveness of the pattern will soon be called into question. Note that the angle of the pattern is not as steep as the first one, so the effectiveness will last much longer.
As with the construction of all Fibonacci tools, arcs require an extreme price (or return or index). In Figure 6.14, the pattern is drawn only after extremely high utilization of the JGB, and the effectiveness of the arches as a support is already evident. In the case of the future Schatz contract, the center is peaking in early October 2002.
Figure 6.19 shows that the top half of the circle has something to offer. This is indicative of the general trend between buyers and sellers who view a break in the line as difficult. In this Schatz futures example (Figure 6.25), using the June high as the origin and the November low as the extreme, the current price is still current.
In the case of the arc pattern, time has been removed and the arcs are created from simple geometry.
Application and Common Errors in Fibonacci Timelines
Bund has a large daily volume and open interest on the exchange, which is much more than Bobl. However, there is certainly no such element of group dynamics here and in the initials. There is something useful in the very short term, as seen in the examples above, but larger projections for a key day are no more valid than there.
However, moving the origin to the 1999 low in the following example (Figure 7.12) produces much better results, especially in the early stages and in almost all subsequent weeks. In this example (Figure 7.14), the bearish outside week is in the congestion at the 1994 high of the ten-year Swedish government bond. There are few improvements in this application, especially in the early days, but as the cycle extends, some key days are identified.
When there is a narrowing of the moving averages and price penetration, the contracts move strongly in the following periods. This is most marked in the case of the three consecutive contractions in the June-July period of 2003 on Bobl futures and again after the recovery in early October. For the Bund contract, the break in the September 2003 channel top coincides with the intrusion of the narrowing moving averages shown in Figure 7.21, where the key periods are identified by the arrows.
This pattern is repeated in the case of the Shatz contract chart of Figure 7.22, where key periods are identified by arrows.
Total Analysis – Pulling All the Skills and Techniques Together
In this next example of a Schatz future (see Figure 8.2 and Table 8.2), a corrective move has already developed and is well advanced. Gann fan-line is a great tool to use here as it is made from "real" critically low cost; this low value is generated when the contract specification changes. Take a look at the UK gilt ten-year yield chart in Figure 8.3 and notice how the pattern is constructed.
This is called the "lower middle line" (LML), and another parallel line is placed on top of the correction, the "upper middle line" (UML). In this example of the yield in the ten-year JGB (see Figure 8.4 and Table 8.3), the "fairies" were an excellent guide for predicting the next moves. In this example of the 30-year US Treasury futures contract (see Figure 8.6 and Table 8.5), the current price movement is within a very steep triangle pattern.
This example of a FTSE-100 futures contract (see Figure 8.7 and Table 8.6) shows that the 23.6% Fibonacci retracement level was removed and that the contract formed a base in early 2003 in an effort to break it. This is related to the close proximity of the 38.2% retracement level and a break of this should prompt further bullish moves. In indicator algebra, stochastics is of little use in cases where there are longer periods of upswings (or downswings).
We must remember that not all tools are useful all the time.
Gann, The Misunderstood Analysis
In the real world this is not always the case and some of the reasons for this are suggested in the 'disadvantages' section. It's an artistic decision on my part not to use it anymore, but I feel that the steepness of the fan pattern and the time elapsed from the origin is too great in this case. This is an example of the danger of applying Gann analysis from an intermediate level and not from a critical high or low.
However, if there is no easy access to high or low lifetimes, the analyst can make a general assumption that high and low data values are good enough. This is why I like to use Gann fans for my analysis near the origin of the pattern, but give it less importance as time progresses and the price action is quite far from the origin. This is comparable to the effort in fractal analysis, where moving from an unusual attractor takes a lot of energy from the system.
Note the consolidation period in August at the connection of line 41 and line 11 in the original fan. Note that the yield levels identified by the hexagon are significant, except for level 5.13. The usefulness of the hexagon appears to depend on the asset class, but the generation of price levels does not.
Looking at some of the graphs in this chapter shows roughly when the fanline system fails and it can be seen that it is often far from the origin.
Other Interesting Studies Using Synthetic Ratios
As part of the original equation solution from Chapter 1, this is an ideal starting point. To calculate the relative ratio of the sphere to the cube, set the volume of the cube as one. As in the previous examples, take 91.1% and 52.3%, which are the decimal parts of the volume of the sphere, as the correction values derived from the circumference of the sphere (see Figure 10.3).
The late September 2003 final attempt to break through the 23.6% level could not be extended and the contract was seen falling back to the conjunction levels of the 41.4% and 44.7% retracement levels . In this example of the Bund-Swiss 10-year yield spread (Figure 10.7), the pullbacks came under increasing threat from the attempted recovery. However, the 52.3% retracement level is seen to be at risk once there is a successful break of the recently developed rally.
This is a great example of the layering effect needed to arrive at a valid technical argument. In the case of the Bund-Swiss ten-year yield differential (see Figure 10.10), this sloping funnel line pattern looks similar to a more traditional Gann funnel line, with the 52.3% line seen as the center of some consolidating moves from the bottom of July 2003. Again there is a flag developing on the spread chart, but it is at little risk at this stage in the development of the flag itself.
In this example of the 10-year Bund yield (Figure 10.12), the correction extremes are set at the highest and lowest values.
