Understanding Fibonacci

Understanding Fibonacci
Learn to apply Fibonacci ratios to calculate price targets in stocks 
October 06, 2011

By Elliott Wave International

The Fibonacci ratio can be an invaluable tool for calculating price retracements and projections in your analysis and trading. This excerpt from The Best Technical Indicators for Successful Trading explains the origins of the Fibonacci sequence and how you can apply it to the markets.
You can read the entire Fibonacci section -- plus 7 more lessons on how to use technical indicators to improve your trading for FREE -- see below.

Leonardo Fibonacci da Pisa was a thirteenth-century mathematician who posed a question: How many pairs of rabbits placed in an enclosed area can be produced in a single year from one pair of rabbits, if each gives birth to a new pair each month starting with the second month? The answer: 144.

The genius of this simple little question is not found in the answer, but in the pattern of numbers that leads to the answer: 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, and 144. This sequence of numbers represents the propagation of rabbits during the 12-month period and is referred to as the Fibonacci sequence.



The ratio between consecutive numbers in this set approaches the popular .618 and 1.618, the Fibonacci ratio and its inverse. (Relating non-consecutive numbers in the set yields other popular ratios - .146, .236, .382, .618, 1.000, 1.618, 2.618, 4.236, 6.854....)



...In addition to recognizing that the stock market undulates in repetitive patterns, R. N. Elliott also realized the importance of the Fibonacci ratio. In Elliott's final book, Nature's Law, he specifically referred to the Fibonacci sequence as the mathematical basis for the Wave Principle. Thanks to his discoveries, we use the Fibonacci ratio in calculating wave retracements and projections today.

How to Identify Fibonacci Retracements
The primary Fibonacci ratios that I use in identifying wave retracements are .236, .382, .500, .618 and .786. Some of you might say that .500 and .786 are not Fibonacci ratios; well, it's all in the math. If you divide the second month of Leonardo's rabbit example by the third month, the answer is .500, 1 divided by 2; .786 is simply the square root of .618.

There are many different Fibonacci ratios used to determine retracement levels. The most common are .382 and .618. However, .472, .764 and .707 are also popular choices. The decision to use a certain level is a personal choice. What you continue to use will be determined by the markets.

...It's worth noting that Fibonacci retracements can be used on any time frame to identify potential reversal points. An important aspect to remember is that a Fibonacci retracement of a previous wave on a weekly chart is more significant than what you would find on a 60-minute chart.

See charts that show the application of Fibonacci ratios, plus 7 other lessons on technical indicators, by accessing your free report now.

Learn the Best Technical Indicators for Successful Trading In this free report, you will learn the tools of the trade directly from the analysts at Elliott Wave International. Using both video lessons and reports, they teach you how to incorporate technical indicators into your analysis to improve your trading decisions. You will learn: How to employ Fibonacci ratios to calculate possible turning points. How to interpret technical indicators such as Moving Average Convergence/Divergence -- MACD. How to exploit trendlines to uncover trading opportunities when stock charting. Technical patterns that can alert you to major moves, and how to know if it�s a legitimate pattern. And more -- 8 lessons in all! Get your Technical Indicators report now>>

The Single Most Reliable Indicator

The Single Most Reliable Indicator

In this video excerpt, Elliott Wave Financial Forecast Editor
Steve Hochberg explains one of the most important things to keep in mind when
assessing a market, "Extreme opinions, shared widely, constitute the single
most reliable indicator of an impending change of direction for a market." Enjoy
your video excerpt.

To find out more about the Wave Principle, be sure to watch the Club EWI video
series: Learn the Why, What and How of Elliott Wave Analysis. This 3-video series
is a great way to get started with the Wave Principle. You can watch these
videos free with a Club EWI Membership.

Watch the Club EWI video series: Learn the Why, What and How of Elliott
Wave Analysis. This 3-video series is a great way to get started with the Wave Principle. You can get these videos free with a Club EWI Membership.

Watch your free video now>>

Credit Crisis in Europe

Credit Crisis in Europe: How the Stability of an Entire Region is Teetering on the Edge of a Major Collapse

 

By EWI's European Financial Forecast editor Brian Whitmer (excerpt)

Panic Now and Avoid the Rush -- July 30, 2010

The market's collective sigh of relief is also reflected in authorities' stress testing of 91 European banks. In case you missed last Friday's results, their message is clear: relax. 

The Committee of European Banking Supervisors (CEBS) gave passing grades to nearly every bank on its list. The group, for example, passed both Irish banks and all four UK banks that it evaluated. The CEBS gave clean bills of health to all four Portuguese banks, all five Italian banks, and five out of six Greek banks that it analyzed. 

Even with share prices that sit 29%-66% beneath their 2009 countertrend highs, the CEBS says that the Bank of Ireland, Piraeus Bank, Banco Popolare, and Banco Santander are all in good shape. In fact, just seven of the 91 banks failed to make the grade. Five were in Spain, one in Greece, and one, Germany's Hypo Real Estate, is entirely owned by the German government anyway. Everyone else -- 84 institutions in all -- are supposed to be strong enough to withstand another economic shock.

It's not so much the stellar results that expose the optimism of a Primary degree rally, but rather the Banking Committee's stress tests themselves. They are notable primarily because they failed to test for any real stress in the first place. As the chart shows, the Committee's "adverse scenario" regarding economic performance assumed a mere 3% deviation from the European Commission's GDP forecast. 

Another test looked at banks' resilience to a sovereign risk shock, yet the analysis merely used conditions similar to those of May 2010. In other words, just like the UK budget office, the CEBS is utilizing a woefully diluted version of the economic deterioration that is about to grip the continent.
______________________________

FREE REPORT: Discover what Europe's debt crisis means for the future of the continent and your investments. Get your FREE 6-page report filled with unique analysis on Europe, the PIIGS and the sovereign debt crisis. EWI's European Financial Forecast editor Brian Whitmer gives you the context for what's happening in Europe and gets you up to speed on the reality of the situation. Download your free report now.

How to Find and "Hook" Potential Trade Setups

Here's anothr free lesson on how deploy the Elliott Wave Princple in your trading plan...

 Happy Trading!!

How to Find and "Hook" Potential Trade Setups   

A Free Lesson on How to Combine Technical Indicators with Elliott Wave Analysis
July 11, 2011

By Elliott Wave International

Trading using technical indicators -- such as the MACD, for example, Moving Average Convergence-Divergence -- can do one of two things: help you or hinder you. 

Using them as a forecasting method alone can be about as predictable as flipping a coin. But when you combine them with other forms of technical analysis (i.e. the Wave Principle), the same MACD can be your new best friend. 

Technical indicators are meant to do exactly what the name implies: "indicate" that a buy or sell signal may be in place. (Don't confuse "indicate" with "guarantee": They are not called "technical guarantors" for a reason.) 

Elliott Wave International's Futures Junctures editor Jeffrey Kennedy shows you how he uses technical indicators to his advantage in his FREE eBook, The Commodity Trader's Classroom:

"Rather than using technical indicators as a means to gauge momentum or pick tops and bottoms, I use them to identify potential trade setups."

Jeffrey goes on to describe his favorite indicator, the MACD:

"Out of the hundreds of technical indicators I have worked with over the years, my favorite study is the MACD [which] uses two exponential moving averages (12-period and 26-period). The difference between these two moving averages is the MACD line. The trigger or Signal line is a 9-period exponential moving average of the MACD line."

Figure 10-1 gives you an example of the MACD indicator in Coffee futures. 

One of the signals of a potential trade setup that the MACD often introduces is what Jeffrey refers to as the Hook. Here's another quote from the free eBook:

"A Hook occurs when the MACD line penetrates, or attempts to penetrate, the Signal line and then reverses at the last moment. In addition to identifying potential trade setups, you can also use Hooks as confirmation. Rather than entering a position on a cross-over between the MACD line and Signal line, wait for a Hook to occur to provide confirmation that a trend change has indeed occurred. Doing so increases your confidence in the signal, because now you have two pieces of information in agreement."

Figure 10-4 gives you an example of the Hook at work in live cattle futures. 

"A Hook should really just be a big red flag, saying that the larger trend may be ready to resume. It’s not a trading system that I follow blindly. All I'm looking for is a heads-up that the larger trend is possibly resuming." 

Learn more about other technical indicators that you can use to your advantage, as well as the other important lessons in the FREE 32-page eBook, The Commodity Trader's Cl

With QE3 back on the table I thought this would be a nice refresher...