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Using Fiboancci Ratios to
Forecast Price and Time

 

FIBONACCI PRICE LEVELS

The Fibonacci number series is a fascinating topic in its own right without attempting to explain its use in projecting stock market and commodities prices. The series bears the name of a 13th century mathematician who reportedly received inspiration for his work from the Great Pyramid of Gizeh. Many of the Great Pyramid's geometrical proportions are Fibonacci ratios. Among the most interesting and less known tidbits are: the Pyramid's height is 5813 inches (5-8-13, and the inch was the standard Egyptian unit of measure); the total measurement of the four sides of the base is 36524.22 inches, exactly 100 times the length of the solar year.

Ancient Greeks showed a fascination for Fibonacci ratios and referred to .618 as the "Golden Section." Existing samples of Greek architecture, art, and pottery show the proportions. Pythagoras, the father of geometry, left us to ponder a Fibonacci triangle inscribed with the words "The Secret of the Universe." Many modern works claim a relationship between the number series, natural phenomena, and human behavior. The many examples of these relationships are perhaps more than mere coincidence would suggest.

Mystical considerations aside, Fibonacci number ratios between market swings not only show up enough times to be more than coincidence, they're downright expected. Whenever a trading signal is hit a Fibonacci price cluster is calculated and placed on the swing chart. The ratios are derived internally from different waves of the current swing and externally from prior swings of the same degree. The calculations are straightforward and can easily be performed with a calculator or spreadsheet. The only "trick" is knowing which ratios and which swings to use for current market conditions. Generally four or five price lines resulting from these calculations are placed on the swing chart. This amount is somewhat limiting but it appears to be a good compromise between providing valuable trading information and cluttering the chart. The daily charts show more Fibonacci price lines.

Just because there are Fibonacci price levels on a chart does not mean that prices will ever reach them. The levels are not predictions of future price levels. They serve a purpose only when, and if, prices get to that level.

When prices do get to a Fibonacci level you want to look for a change - a stall or reversal. If prices jump or fall through a particular level look for prices to at least reach the next level. Robert Miner (and W.D. Gann before him) equates this phenomenon to the action of electrons orbiting a nucleus. Electrons can exist only in certain energy levels, not scattered randomly around the nucleus. Like electrons, stock prices tend to 'jump' between energy levels, and that energy level is usually the next Fibonacci price level.

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