Fibonacci,Fractal Geometry and the Financial Markets

Oct 31,2011

To All : Good day! and a  meaningful Halloween  to Everyone!!

 I got a  response from an anonymous trader  having a lot of questions offline after reading most of the post and pages of my blog.  He got a lot of questions about the Fibonacci , Harmonics, Fractal Geometry, Golden Ratio and how it relates to the financial markets and a couple questions  more that i will not mention further in this blog. But I know by just reading  between the lines that there is a lot of confusion going on inside  in his head.  This concept  and knowledge that i have learned from mentors and reading  from a lot of  books is that i did not learned it overnight,  neither  did I invent it.  It takes much time to digest and a lot of patience to really understand its principles.  I even tried to make an experiment and test the theory myself before i started to believe.  I also remember seeing myself  in that position before years back, and i began questioning my trading methodology; the implication to it on my life and what's the true nature on how it works.   This is where intuition in consciousness is important, when we want to have the answers to our questions, when  we want to learn the facts from fiction, and the truth from reality. "You must have the right Questions to find the Right Answers, because in reality, Life is an Open book."

But what i can do to help him  is to refer him  to some useful information  that he can learn from- I'll email him. I have dug this out from a pool information in the Internet( you tube).  And I found this very informative.>> This sums up all the concept that you can learn upon.  This is a very good source especially coming from Gordon Graham, Prechter and A.J Frost  as one of the associate of R.N. Elliott.   This is the very essence the foundation and  principles that I believe in and  applies  to my method of trading.  Also for the benefit of other novice traders-I posted this video.

To : anonymous
"I don't have all the answers to your questions and it will take much time and resources to answer that, and  i'm am not really a good teacher, but with new  age of  internet it makes learning much easier. So its up to you to find it to yourself. So i let this videos speaks for itself."

Highly recommended -Very Good movie !                                                                     note: 80 mins video

Fibonacci, Fractals and the Financial Markets

Fractals, Self Similarity, Patterns and Hidden Dimension

ns

Background Research 

Michael Frame, Benoit Mandelbrot

http://classes.yale.edu/fractals/

End

By: Gtrader

-Caveat!!

PSEi Update Nov1- Dec 9 -2k11(modified)

PSEi  Forecast - Continuation  (Updated)
Oct 30,2011


Last Oct 27 , I made a review for the computations of my forecast, and made a couple of changes considering the new data that i acquired and some new factors that i was not able to consider. The critical part of  it was that each data (dates)  point  has a lot of computations involved and each are inter correlated to the previous date.  So if  ever i made a  mistake in a series,  the succeeding series of computations may be computed wrong or inaccurate forecast. And it is very important on my part to constantly review my computations and update my forecast to continuously improve my method.

Changes made:
1.   Reviewed mathematical computations per date.
2.   Included Volatility factor in computation
3.   Added 4th Harmonic pattern  to 2nd harmonic pattern for better accuracy.
4.  Dates are verified by swing charts

Scenario. 1

Scenario.2 Updated -Nov 1

Disclaimer:  The author will not be liable to any effects in your
                      financial/ trading  decisions for these forecast are mere personal insights ,projections and forecast  and does not  reflect the actual market movement. Traders are advice to trade at their own risk.

Phil Market Forecast

Oct 13-Nov 15 = Consolidate between 12.5% - 61.8% retracement levels (4226 -3815) for 3 to 7 waves.  It will break the resistance on the 3rd wave or 5th wave.- watch  out for a exhaustion Gap for confirmation.

Swing Days
Low Days- Nov 1-2    Bottom - Buy
High Days- Nov 7-8    Peak  -  Sell
Low Days -Nov 14-15  Bottom - Buy
High Days -Nov 22-24  Nuetral - Sell
Low Days -Nov 28-29   Nuetral - Buy
High days - Dec 5-6    Nuetral - Sell
Low days - Dec 7-9   Bottom - Buy




Nov 15- start of  a rally in the index ( good for long term traders  to enter the market)
-minimal participation of the masses.(low volume)


Nov 25- might enter resistance at the 66.6%  to 61.8 % level and stay for a few days .
( has narrowing gap between open & close)-    Many technical analyst at this point will began to recognize a Cup and handle pattern  and many  institutional traders -buyers will enter the market .

Dec 7- 9= Hope and good news will be out in the market. Index will rally  to
 Start  a bull run in the Market   until 161.8% retracement with  High Volume of participation  from the public.
 Net foreign buying will be the name of the Game. Choose the stocks with sound fundamentals.
" Choose stocks fundamentally, while Trade Technically"

Recommended on Dec: Blue chip companies
Mining & Oil - Long term buy
Power corp: very bullish- Long term buy
Services sector- near breakout good buy at breakout.
Banking sector and Brokerage firms- first to move rally

caution : Market might weaken  between Feb 2- 5  2012 for a possible  correction.

"How to determine the Range of a corrective pattern using Fibonacci Fan."

10/29/2011

I encountered a  lot of technicians experience difficulty in  Trading a corrective pattern or on a consolidating  market.  We'll I have to admit, that is also one of my difficulties when I first began trading.  But as I went along practicing vigorously; this technique which was  taught to me by  Mr. G.Marish  years back seems to me as one of the most reliable , flexible and useful  trading  technique  which is applicable to any market,  whether you're in a bull or bear trend.  This is also applicable in different time frames whether you are trading on a daily chart, weekly or an monthly chart.

 Yes I know, technicians have their support and resistance lines which is also as useful  by identifying such levels; but this method can be in-Aid or supplement to your  existing method  of Technical Analysis by using the Fibonacci Fan Angles to better improve your technical skills. However; this technique cannot be traded alone and  should also requires other technical indicators such as Volume, RSI, Momentum and Etc...

The Fibonacci Fan Angles  tool can be used by a trader to any market, or any software having this said features.  But for my example, I will be using Amibroker as the program of choice because it is the most commonly used by many Filipino traders as far as i know.

The Fibonacci Retracement and Fabonacci Fan tool can be located in  Amibroker from this toolbar:

What is a Fibonacci Fan look like ? 

The diagram shown above is an example of a Fibonacci Fan diagram . 

The Diagram outlays the angles ( 1x1, 1x2, 2x1 and 4x1 ) from the 2 dimensional  Price and Time axis.  The most important angle -ratio is the 1x1 angle or the 45degree angle.  So for a bull market  common rule is that if prices broke above the 1x1 line ; the trend changes and tends to be  more bullish but if the price broke down below the 1x1 line, the trend changes to be on the bearish side ; while on a Bear market, its the other way around.

Determining the  Range of a corrective pattern
using Fibonacci Fan

PURPOSE :

    -  To identify future support and resistance levels after a Correction. - to get (RZH and RZL)
                   which can be used  in determining entry point and stop loss price levels

    - This technique is used to determining the range of a correction pattern 
    - A type of dynamic price and time analysis by using Fibonacci angles.
     - Minimize your risk by  shielding your position against volatility.

A Correction is a market  reaction after a major/minor trend ( Bull/ Bear ) has been broken or reverses. Same as the Laws of Physics that for every action will always have an opposite reaction.  But the question is on what conditions? this technique  will answer that.
    After a major/minor move (Bull / Bear trend)  it is normal to any market for a correction to occur, and when this happens , the market  will only move  in  three ways :

          1.  A Continuation of trend- continuation of the prior major/minor trend
          2.  A Consolidating trend  - consolidating on an specific range( sideways movement) w/n RZH& RZL
          3.  Reversal of trend- reversal in major/minor trend

TERMS USED 


         P1 -  " Point 1"    Starting point of a Major or Minor Trend
                                   note: In a Bull correcting  market P1 is  lower in price level than P2
                                           In a Bear correcting  market P1 is higher in price level than P2
                      
         P2 -  " Point 2 "   Ending point of a Major/ Minor trend that is projected  from  P1

                                   note: In a Bull correcting  market P2 is  higher in price level than P1
                                           In a Bear correcting  market P2 is lower in price level than P1



         P3 -  " Point 3"     It is  the most bottom or peak of the latest correction trend/ wave

                                 note: In a Bull correcting  market P3 is  higher in price level than P1 but lower than P2
                                         In a Bear correcting  market P3 is  lower in price level than P1 but higher than P2 
                               to be a valid P3 ( it must fall on one of the Fibonacci levels )     


          L3 -  " Line 3 - A line that emanates from point 3 projected perpendicular to the  "1X1" Fibonacci line



        RZH -   Retracement Zone High- signifies upper price limit zone. ( horizontal component of S1)
                     A price broke above RZH is considered to be in the Bull territory and calls for  a BUY



        RZL -   Retracement Zone Low- signifies lower price limit zone. ( horizontal component of S2)
                     A price broke above RZL is considered to be in the Bear territory and calls for  a SELL


              S1 -      Intersection between the L3 and "2x1" line

        
              S2 -      Intersection line between L3 and the " 1 x 2 " line


              EL -   Recommended Entry Level to signal  "BUY"


              SL -  Recommended Stop Loss to signal " SELL "



PROCEDURE
    I'LL BE   ENUMERATING  THE PROCEDURES BY GIVING A STEP BY STEP APPROACH  OF TEACHING  WITH  THE AID OF ACTUAL STOCK QUOTES and CHART.

  i have chosen  NI  only as an example and does not in any way suggest any recommendation  !!!

Example :  NI HAO MINING - June 2011- OCT  24 2011 DAILY CHART

HOW TO GET THE EFFECTIVE RANGE OF A CORRECTION.

STEP 1.    - LOCATE P1 AS THE STARTING POINT OF THE TREND 

 so for NI  Bull correction: I chose ( 5/25/2011)  bottom as the starting point shown in the picture below because the support has been tested many times before. It is also good trading practice to always project a Fibonacci retracement from prior highs or lows in order to identify significant  price support and resistance levels.

STEP. 2   DRAW AND LOCATE P.2
                              IN A BULL TREND P2 IS THE HIGHEST POINT IN A TREND
                             WHILE IN A BEAR TREND- P2 IS THE LOWEST POINT IN THE TREND

 For NI :  P2 is located on Sept 22,2011 of  the highest price level of the trend.



STEP. 3   DRAW A MAJOR/ MINOR TREND LINE. FROM P1 and LOCATE P2

 For NI :  Click the FIBONACCI FAN  tool command shown above. Also activate your snap to Price option for better accuracy.  Then click  P1 as the starting point and drag the second point to P2.  P2 will be the terminating point and the Fib Fan will be created. having an upward opening to the right. shown below.

STEP 4.   LOCATE P3 AS THE HIGHEST OR LOWEST PRICE LEVEL OF A CORRECTION WAVE .   THIS CAN BE FOUND IN THE FIRST CORRECTIVE  WAVE AFTER THE PRIOR TREND (P1 - P2)  SEE SAMPLE.

TIPS:  Finding P3 can be the most tricky part. But remember that usually P3's can be found falling within the Fibonacci Retracement levels. in the case of NI - 61.8%

STEP. 5.   DRAW A LINE MATCHING POINT 2 and POINT 3.
                                                        ( THIS LINE IS NAMED - L3)-RED LINE

                 FOR NI :  This is shown by a thick red line connecting the two. shown above

Important Rule : L3 must always be perpendicular to the 1x1 line

In order for you to check if you have done the procedure correctly, you will notice that the figure created by  the connecting lines point 1, 2 & 3 forms a perfect right Triangle. So if it appears like this ( shown below), then you have done it right!!

                       
STEP 6. IDENTIFY S1 and S2  FROM THE INTERSECTION OF L3 to  1X2  and  2X1. shown on        
                                                 green squares below.     note:  NO intersection to the 1X1 Line.

STEP 7 : PROJECT A HORIZONTAL  LINES ON S1- for RZH    - GREEN LINE
                                                                           ON S2 - for RZL     -  GREEN LINE
                BY CLEANING UP THE LINES, AND OUR GEOMETRIC ANALYSIS, OUR CHART
                  WILL LOOK LIKE THIS.

HOW TO INTERPRET :

         AS A RULE OF THUMB :

Any price that broke above RZH  is considered  entering in a bull territory and a BUY call is placed above the RZH line, and  that line will be your new support level.  If the Price breaks below the RZL line, it is then considered entering on a Bear territory and advised to put your stop loss below the RZL line, and it will be your new resistance level.


          Volatility is still within this levels so it is advisable to put your buy signal 3%-5% ABOVE the RZH line.
And for Sell signals  should be 3%-5% BELOW the RZL  depending on the risk tolerance of the investor.


If the Price levels seems to be within RZH - RZL  zone. It is expected that the Market is still  in consolidation mode or sideways movement.  And investors at this point may opt to stay at the Sidelines and wait for the RZH to be broken, or HOLD their positions longer while some Risktakers may  want to navigate on the ups and downs of the consolidating market and make some modest gains.


          Investor -Traders may also limit their Risk exposure  from wherever the price is located in the zone. Like during consolidation, they may limit their position depending on the range difference of the through  and peak of each consolidation. But if the RZH line has been broken, they might want to add more positions to to their portfolio to limit risk. On the other way around if the RZL is broken, a sell signal is recommended and risk is averted.






Thankyou for visiting my Blog
Let me know your comments and suggestions


Caveat
-PinoyGtrader


      




SEE    Examples shown  Below: 
 chosen stocks are for sample purposes only

             The PSEi daily chart

RZH: 4291 

RZL : 4097

                                                                               AGI

RZH: 10.27

RZL : 9.41

                                                                                 LC

RZH: 1.39

RZL : 1.24

                                                           

MEG

RZH: 1.85
RZL : 1.69

End