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Part V: Using Fibonacci to determinate market goals

Tue, Jul 4 2006, 09:33 GMT
by Facundo Molina

MolFX - Management

Step 2

Afterwards, we move the following fields-data to a new table: minor rally number, start price, end price, duration (in hours), and the distance in basic points or pips.


Then, we move the major trend direction to the new table, came up from the application of the Zigzag Oscillator to the major period under study.



After the legs of the ZigZag were found (bullish and bearish rallies), we apply the Fibo’s ratios at any leg (“zig” or “zag”) that coincide with the major trend (In this case, Week), and so, we check if effectively the price retracements will go to the Fibo’s zones, or zones define by this special numbers.

Beginning with the graph example, where it explains the Zig Zag application, we continue the main analysis with the objective of verify graphically the behavior of the Fibo’s ratios in the retracements.

Inside the major trend we isolate in Graph 5, we proceed to apply the ratios of Fibonacci to the bullish rallies A1, A2, and A3.

In case of Rally A1, we take the complete distance from its minimum price at USD 1.0762, to the end at 1.1862 dollars per Eur. Then, we apply the Ratios of Fibonacci trying to see where the prices go after have reached the peak, and started the retracement.



In case of the bullish rally A1 with 110 basic points, and applying the Fibonacci Retracement ratios, we calculate the price for any ratio, trying to find the possible zones where the quotations could stop, so:



Looking at graph 6, and after the price retracement have begun, in opposite direction of the major trend, the price goes to the 23.6% zone. Firstly, the price couldn’t break this zone, and start to reduce the speed, and begun a change direction turning bull. This change is not considerer by the Zig Zag Oscillator, because the slope is lower than 12%.

After the price stops, it moves to the 38.2% zone, where its value is USD 1.1442. According to the results of Zig Zag Oscillator, the quotation stopped in an intermediate zone between 38.2% and 50%.

Secondly, we study the Rally A2. This rally begin after the B2 retracement has finished, at USD 1,1375 per Eur, and finishes on 01-12-2004, with a price value of 1,2900 dollars per Eur (Graph 7).



Besides, we apply again Fibonacci’s retracement ratios, to know the possible quotation behavior,



In this case, we can see a price retracement with a minimum value at 1.2334 dollars per Eur, near to the Fibo’s ratio, 38.2%. After that, the quotation rebound, and continues with the dominant trend.

Finally, and following with the bullish trend on Rally A5, the price goes to 1.2930 and change later the dominant trend, as we can see in graph 5. To confirm a change of the dominant trend, the retracement must be more than a 100% of the last rally, in the present example the price need to break 1,2317.

Continuing with the Statistic Analysis, we calculate the price values of any currency pair under study. In this example of EURUSD, you can see them in the next table:



As you can see in Table 13, the Bullish rally number 4 begins at 1.3836 dollars per Eur and ends at 1.4249. We apply the Fibo’s ratios, and we obtain the corresponding prices. For example, for ratio 23.6% the price is 1.4152 dollars per Eur. In others words, once the quotation rebounds at maximum USD 1.4249 per Eur, should go back to the first target of USD 1.4152.

Step 3

Once the prices targets for any rally were obtained, we proceed to probe the objective success of the system. Previously, we define 3 scenarios, or zones around the price, and test the truthfulness of the retracements go to these values or zones.

Each zone was defined with a percentage of the rally distance (zig or zag). For more information, we refer that we select the complete rally of the leg of the Zig Zag under study, for example: 100 pips, and if the price goes to the zone defined in more or less 7,5% (in this case in more or less 7,5 basic points) of the Fibonacci’s price, so the propose target is accomplished.

The scenarios are:

- 15% Zone: +/- 7.5% of the total rally, above the Fibo’s price.
- 20% Zone: +/- 10% of the total rally, above the Fibo’s price.
- 25% Zone: +/- 12.5% of the total rally, above the Fibo’s price.

Then, using the logical formula, we try to prove if the retracement of the price will go into the define zone.

In case that the final price of the next rally (mean the retracement), go into the Fibo’s define zone, the logical sequence is True, and so, successful. In the other hand, is False, and do not achieve the target.

Step 4

Finally, we proceed to calculate the number of retracements which go to the objective zone inside the dominant trend. In the present example, where we analyze the behavior of the currency pair EURUSD, Diary, we obtain the following results for the 15% zone:



As we see at table 14, we obtain a success of more than 70% of the propose objective. We refer that the retracements go to the Fibo’s price zone, when the minor trend correspond to the major. Meanwhile in case that the minor trends have different direction to the Major ones, the Fibo’s ratios have not got a significant success.

Thank you very much to all readers for continuing the interest till the end. We want to invite you to see the final part where we offer the investigation results, and the final conclusion.

Published on  Tue, Jul 4 2006, 15:41 GMT