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With this video we have a look at Fibonacci projections and retracements. Leonardo Pisano Fibonacci was an Italian mathematician born in 1170. He was considered by some to be, “the most talented mathematician of the Middle Ages”. Fibonacci introduced the so-called method of the Indians, which today is known as Hindu-Arabic numerals
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Hallo, Sylvain Vervoort with technical analysis part 23. With this video we have a look at Fibonacci projections and retracements. Pay a visit to my website at stocata dot org and buy my new book “Capturing Profit with Technical Analysis”, a complete technical analysis reference and a winning trading system.
Leonardo Pisano Fibonacci was an Italian mathematician born in 1170. He was considered by some to be, “the most talented mathematician of the Middle Ages”. Fibonacci introduced the so-called method of the Indians, which today is known as Hindu-Arabic numerals. He also presented, and solved, a problem involving the growth of a hypothetical population of rabbits, which was based on idealized assumptions. The solution was a sequence of numbers that, over several generations, became known as Fibonacci numbers. The number sequence was known to Indian mathematicians as early as the 6th century, but it was Fibonacci that introduced it to the West. Fibonacci numbers have the following sequence: 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, and so on. Each number is the sum of the two previous numbers. The higher up in the sequence, the closer two consecutive numbers of the sequence divided by each other will approach the golden ratio or approximately 1.618, or 0.618. Fibonacci numbers, or patterns, are found in seashells, flower petals, sunflower seed heads, pinecones, palm fronds, pineapple rinds, and 90% of plant leaf and petal arrangements.
Charting Fibonacci levels is done by first drawing a fictive vertical line between two turning points that you wish to examine for Fibonacci levels, here between the references 0 and 1. Next you draw horizontals through retracement levels at 100%, 61.8% (100*0.618), 50%, 38.2% (61.8*0.618), 23.6% (38.2*0.618), and 0%; next you draw horizontals at three or more Fibonacci target levels at 161.8% (100*1.618), 261.8% (161.8*1.618), and 423.6% (261.8*1.618). After the price moves up or down, there often will be a partial retracement, which will find support and resistance on Fibonacci levels as can be seen in this chart.
Looking at Fibonacci targets in an uptrend on a daily chart, you could, once Elliott wave 1 was formed, construct a Fibonacci projection between the start and end of wave 1. That way you could predict the price top for wave 3 at around $43 with the Fibonacci projection at 161.8% and the top of wave 5 at around $49 with the 261.8% Fibonacci projection. And it gets even better. Let's use this Elliott wave top 5 as the new reference point for a longer term projection. We make a Fibonacci projection based on the start of wave 1 and the top of wave 5 on a weekly chart.
And believe it or not, long term we reached the targets at 161.8% or about $60, the target at 261.8% or about $75 and finally 423.6% or about $105. What else is there to say? Long live Fibonacci!
Does it also work with falling prices? Looking at Fibonacci targets in this downtrend on a daily chart, you could, once Elliott wave 1 was formed, construct a Fibonacci projection between the start and end of wave 1. That way you could predict the price bottom for correction wave A at around $38 with the Fibonacci projection at 161.8% and the bottom of correction wave C at around $32 with the 261.8% Fibonacci projection. Can it get better than this? Let's use this Elliott correction wave bottom C as the new reference point for a longer term downward projection. We make a Fibonacci projection based on the start of wave A and the bottom of wave C on a weekly chart.
I assume you won't believe this. Long term price fell to the targets at 161.8% or about $20 and the target at 261.8% or about $2. Once more. Hip hip hurrah for Fibonacci!
Retracements are most useful when you want to estimate how far correction waves like waves 2, 4 and B are pulling back before continuing their previous main trend. Here you see a B-wave retracement to a level of 38.2% of the previous A-wave. 50% retracement is very common and even 61.8% will happen regularly.
At the start of a medium term price reversal, there is no second point available to create a Fibonacci projection. Here I propose to use what I call a historical Fibonacci projection. That means using price history of previous support or resistance levels to find a second reference point. Simply because we know that previous support will many times become resistance or previous resistance will become support in the future. Here we make a projection from the low point end of February and a previous turning point half of February. It helps if this second point has more confirmations in the past like here beginning of December. It also is a good sign if the future projections coincide with turning points out of the past, which as you can see is also the case here. Let's see next if this kind of historical projection does the job.
And of course it should work fine. Naturally, once you have new prominent turning points, you should use them for the normal Fibonacci projection method. But, you will be surprised how well the historical projection does the job!
This is the end of the Fibonacci projections and retracements. Now we can continue the Elliott waves series with Elliott price targets. For that we will use Fibonacci targets and retracements. Tell your friends about these videos and while visiting my website you should order my new book “Capturing Profit with Technical Analysis”, a complete technical analysis reference and a winning trading system. See you in my next video!
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