Precise sight

Mohab Nabil is a full member of the Society of Technical Analysts UK. He has published numerous articles on technical analysis for the Egyptian as well as for international journals. Mohab teaches a course of technical analysis at the Regional Institute of Information Technology (RITI) in Cairo. Furthermore, he trades on the American stock markets and conducts its own studies, concentrating mainly on recognizing patterns and cyclical analysis. Below is a technique for determining the price break after goals from the previous price fluctuations. Fibonacci analysis, which is used in various sciences such as astronomy, mathematics, and architecture, also plays an important role in the design of pricing objectives in the financial markets. After working with the Fibonacci ratio in the next few years, I developed a technique to determine the price after the breakthrough goal up or down from the previous price fluctuations, which I call the goal Projected Fibonacci (PTSF).

Basic Principles
Before using the projected Fibonacci purposes, it is important to understand that a breach of support levels often become resistance levels during a subsequent rally, especially if the violation level of support coincides with the Fibonacci level of recovery. Figure 1 shows a hypothetical example of the price reduction from point A to point B, followed by the consolidation, and finally a breakthrough to the point C (the classic example of the downward trend). Broken support level set at the time of consolidation is now acting as resistance for the subsequent rally. The resistance at around $ 60 also represents 50% of th restoration movement from A to C (from $ 100 up to $ 20).

Fig 1. Classic example of the downward trend: After a breakthrough level of support, it acts as a resistance level

Chart 2 presents a timetable for "Xilinx, Inc." (XLNX) to October 4, 2000. to November 2001. which shows a decrease from point A to point B. The trend temporarily halted, and formed an area of consolidation with support in the region of $ 58. After a break below $ 58, a new decline has reached a minimum at $ 35. Then the price rose from the minimum back to $ 58, which is an important level, because it was the level of the previous consolidation. Now this level has changed its role and acts as a resistance. Moving from $ 35 to $ 58 is about 38.2% recovery in traffic from $ 92 to $ 35 ($ 92 - $ 35 = $ 57 * 0.382 = $ 21.77 + $ 35 = $ 56.77).

This example shows that when the level of resistance (or support level) constituted a violation

Fig 2. Broken support and resistance levels coincide with the restoration of Fibonacci.

previous support (or the previous resistance), it often coincides with the Fibonacci ratio (23.7%, 38.2%, 50%, or 61.8%) of the total traffic, ending the level of resistance (or support), which is not easily upset.

Engineering
The main premise underlying the design objectives of Fibonacci is that market fluctuations in the same direction, are connected with each other from the points of a breakthrough. Consequently, the movement from point B to point C in Figure 2 is connected with the movement from point A to point B Fibonacci ratio. It is important to note that the ratio between the two oscillations occur on a breakthrough level of support or resistance, rather than the beginning of the second variations in the same direction. Based on this principle, we can conclude that the point of breakthrough are important Fibonacci levels of recovery for the subsequent correction. Therefore, pricing objectives may be obtained by assuming that the point of breakthrough is one of the Fibonacci levels of recovery, and that trend should continue as long as it does not disturb the level of support / resistance (fixed rate recovery Fibonacci) and begins a counter-trend correction. Using this technique, you will be able to project future price objectives:

Projected goal Fibonacci (PTSF) using only four Fibonacci ratio: 23.7%, 38.2%, 50%, and 61.8%. If prices overflows the horizontal level of support / resistance, then use the following formula:

PTSF = (Fibonacci ratio * A - B) / Fibonacci ratio - 1

where:
A - the first point of the price fluctuations
B - the first point of the price fluctuations (horizontal support / resistance)

Fibonacci ratio - one of the following: 23.7%, 38.2%, 50% or 61.8%

You will need to calculate values for the four targets, ie for each of the four Fibonacci ratios. Example of application PTSF shown in the chart Dow Jones Industrial Index (DJIA) in the scheme 3.

Figure 3. Projected Fibonacci goal.

These four levels are calculated from the point of breakthrough. Please note, as then the price is consistent with these levels. Upward movement, starting from the point A (7400) to point B (8180) was accompanied by a downward correction. Only after the price broke above the resistance level, you can apply the Fibonacci Projected goals. In this case, you can calculate the four target levels, using the formula PTSF:

Restoration of 23.7% or 0,237
PTSF 1 = (0.237 * 7400 - 8180) / 0.237-1
PTSF 1 = 8420

Restoration of 38.2% or 0.382
PTSF 2 = (0.382 * 7400 - 8180) / 0.382-1
PTSF 2 = 8662 (rate, which temporarily suspended the increase)

Restoration of 50% or 0.50
PTSF 3 = (0.50 * 7400 - 8180) / 0.50-1
PTSF 3 = 8960 (rate, which temporarily suspended the increase)

Restoration of 61.80% or 0,618
PTSF 4 = (0.618 * 7400 - 8180) / 0.618-1
PTSF 4 = 9440 (rate, which temporarily suspended the increase)

You can apply this technique to the downward movement in exactly the same way. A weekly schedule of FTSE 100 index in the figure 4 shows the downward movement starting at point A (6951) and ending at point B (5973), accompanied by accumulation area, which lasted more than 10 months. After this consolidation, the price broke below the support.

Figure 4. Projected Fibonacci goal for downward movement.

After a break of resistance can be calculated trust level 4. Applying the formula for the Fibonacci projected goals, you get the following cost objectives:

Restoration of 23.7% or 0,237
PTSF 1 = (0.237 * 6951 - 5973) / 0.237-1
PTSF 1 = 5670

Restoration of 38.2% or 0.382
PTSF 2 = (0.382 * 6951 - 5973) / 0.382-1
PTSF 2 = 5368 (rate, which temporarily suspended reduction)

Restoration of 50% or 0.50
PTSF 3 = (0.50 * 6951 - 5973) / 0.50-1
PTSF 3 = 4995

Restoration of 61.80% or 0,618
PTSF 4 = (0.618 * 6951 - 5973) / 0.618-1
PTSF 4 = 4391 (rate, which temporarily suspended reduction)

Managing money
Points Projected Fibonacci objectives may also indicate the trend of turn, making them a convenient tool for the application of strategies for managing money. The schedule presented in the figure 5 illustrates how this can be done.

Figure 5. PTSF as a tool for managing money.

First PTSF determines a point spread, which can be used as the level of output. Downward movement starts at point A (11 750) and ends at point B (9732), accompanied by an upward correction, and, ultimately, to break through support at the level of B. If you apply the formula PTSF, it is possible to calculate the projected value for the first goal:

Restoration of the Fibonacci 23.7%:
PTSF 1 = (0.237 * 11750 - 9732) / 0.237-1
PTSF 1 = 9105

The first Fibonacci projected goal was achieved, as a minimum for the DJIA was 9107, just two points not reaching to PTSF 1. As can be seen in the figure 5, PTSF 1 noted an important turn in a week's trend, as the DJIA again resumed its upward movement. This goal can be used as a point of exit from the short position.

Conclusion
Like all indicators, Fibonacci projected goal is not an autonomous technology, but because of its efficiency and accuracy in projecting price targets, it must be one of many technological tools in the arsenal of the trader. This works because the market fluctuations in the same direction is often linked Fibonacci ratios of the point break the previous level of support or resistance. These points can be combined with normal money management strategies to minimize risk and maximize profit.

Forex Magazine
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