Not only the series but also the setbacks are widely used in the financial markets and as we have repeated on numerous occasions it is more reliable when the time period is longer. Next, we will give some small guidelines on the history and application in the markets of one of the most important tools used in the Forex market among others: The Fibonacci Series.
It turns out to be very useful the setbacks and expansions of Fibonacci Series at the time of determine point at which the market can change direction and we shall know how to measure the movements, from where and have knowledge of the Expansive Fibos.
Let’s start with a brief historical reference about who discovered the series and who has developed it:
Leonardo Fibonacci of Pisa was an Italian mathematician of the 12th / 12th century who discovered a series with a certain pattern applicable to many areas in nature. Later it was the well-known Elliot who defined Leonardo’s discovery as the Law of nature inherent to all things, affirmed that of the Secret of the Universe. The development of the theory is formalized based on the reproduction of rabbits and how there’s a constant pattern in that reproduction, but we’re not going to go into the explanation of the sexual activity of rabbits for not coming to the case. Said pattern called the golden segment has been studied by not a few great minds like Michelangelo in his references to the symmetry of the human body with man of Vitruvius. Even the pyramids follow this same pattern in their construction and their location.
These principles are presented in all cases of nature in one way or another. This theory has been shown to be valid because it is directly related to the progressive development of dynamic structures and given that our society Just as the stock market fall into this category they are of valid application.
The series is very simple and results from adding the previous number to the current one. The sequence can be written as follows: 0.1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 14. After the eighth sequence of calculations. There is a constant with the relation of the derived from the series. For example, if you divide the previous number by the number of ahead, this produces 0.618. Dividing the previous number derives another relationship from the sequence. This relationship provides approximately 1,618.In summary, from this simple series we have to say that each and every one of the setbacks (23.6%, 38.2%, 50%, 61.8%, etc.) and expansions (161.8%, 261.8% and 423.6%) are small formulas derived from Pi.
Somehow these numbers make support and resistance for the market and potential turning points of the price. Not every one of them works in all the cases, but we do have several more sensitive ones. These are 23.6% and 61.8% as levels of normal setbacks and with expansive 161.8% and 423%.The theory dictates that you measure from maximum to minimum and vice versa but not in many cases, It works because it is the standard mode. In the end it is a tool and the use of each one is already a world to deal with.
In this area we will try to give the public a practical view of the use of setbacks and extensions. It is necessary to comment that not only there are setbacks that everyone knows but also the Fibonacci arcs. Fibonacci fans and Fibos to measure zones hours. This tool is not intended to prepare inputs or outputs from the market, which you can also, but to measure the waves and impulses and see where it is located the price always. This type of analysis is combined with Elliot waves and his principles. The most common is to place the Zigzag indicator in the price for mate you loved theories.
The behaviour of the price in many cases follows a pattern of behaviours that is repeated always and even at different scales as we can observe in fractals. But what we care about is the measurement of impulses and setbacks to estimate if a certain movement can be repeated and with what magnitude. It’s about transporting Fibo levels to the last significant setback to be able to analyse if in the case that the trend continues the movement will be the same or like previous. The pure theory says that we should measure from beginning to end but as All general considerations are only recommendations, given that the practice Indicate that sometimes you must be very scrupulous in the choice of points measurement.
It is practical to measure and transport because, in currencies, movements tend to be very tendential and when they take direction the structure is very similar, let’s move into action. It can be messy, but it’s the simplest thing there is, it’s about measuring a movement after a break and transporting the entire module to the last setback and that process we will repeat until the trend is over and we have to do it in the reverse way. In this case we have analysed and transporting bullish Fibonacci modules and once the trend has been exhausted bullish we started with the same bearish process.
- First step: We measure the movement from the first recoil after the break, what which is not a big effort and once we are used to doing it It will be a matter of little time that we give with the correct impulsive module.
- Copied the Fibo we transported until the last significant setback that will match with any of the previous levels. We must transport the tool (in mt4 only with selecting it and pressing ctrl doubles to save time) where does a new trend movement.
- Repeat the transport of the module to the last retracement. Consider that the existence of 2 modules is always necessary for any movement outside of the considerations of the count of the Elliot module. The explanation is simple, Traders entering the market fulfil a first objective, close positions and they come back at a better price; that’s why the two waves are necessary for the normal development of the price.
The measurements are not perfect, but they are quite approximate, so we can calculate to what possible levels will tend the price. It is a simple measurement process, but it is extremely accurate in manyof the cases. The distances are symmetrical and trace the previous movement. This type of symmetry is called harmonic trading and follows pretty strict guidelines, that figure is called AB = CD and it’s not just duplicating the wave but also to estimate the turning point where the price can correct. The The characteristics of said figure will be explained below in the next topic.
Currently there are indicators that save us all the calculations and that the we can find on the network and on different platforms. Consider that this type of analysis can be complementary to what we do every day. We will see next the inverse process, this consists of measuring the setbacks for to be able to project the levels to the future. To perform this activity, we have to measure those setbacks that are interesting before a start of a movement impulsive. For some reason, this measurement is very advisable given that on many occasions the impulses are so strong that it leaves us no other option than project levels.
This is done in assets in which the price marks record highs after maximums historical events, such as the gold that we have seen in recent months as the price did not stop rising without having many methods available to narrow the price measurement.
An example, in which we have measured the price decline before it starts to mark maximums after maximums. We have seen as the first Expansive level has been marked with perfection at 161.8% and beyond at 261.8%.
The most important thing is to make friends with the measurements of waves kicks and extensions, as modus operandi when measuring impulses and setbacks. With the available technology we will not have to do it manually, so we lend attention to this area is of vital importance as an addition to our method of analysis.
The importance of Fibonacci Series extensions lies in that, the most important thing to the time to analyse the price is the beginning of the movements, if you correct a lot, if you create consolidation zones and or supports or resistances. It has been proven that in many cases the guidelines for the development of the price determine at the beginning so we look at things as small as setback in Impulsive movements can give us clues to the future behaviour of the price of an active.
We have explained the basis of this technique, but it is only the tip of the iceberg of the studies that have been carried out after that and more concretely in EE. UU in the years 80. We are talking about Harmonic trading that bases its principles on failures of structures of prices and depletion of the strength of a certain asset. Many will find it strange that only with measurements and Fibonacci ratios can you determine points of entry and exit, but nothing is further from reality, even the FED went to those who developed the technique to learn from them. These harmonic patterns are not only applicable to the bag itself way that the Fibonacci retracements, but also to all that graph with sufficient liquidity or absence of manipulation.
Do not miss our Learning Forex: Lesson 11