Fibonacci And Gann Applications In Financial Markets
Fibonacci and Gann Applications in Financial Markets
WILEY TRADING SERIESSingle Stock futures: A Trader’s GuidePatrick L. Young and Charles SideyUncertainty and Expectation: Strategies for the Trading of RiskGerald AshleyBear Market Investing StrategiesHarry D. SchultzThe Psychology of Finance, revised editionLars TvedeThe Elliott Wave Principle: Key to Market BehaviorRobert R. PrechterInternational Commodity TradingEphraim Clark, Jean-Baptiste Lesourd and René ThiéblemontDynamic Technical AnalysisPhilippe CahenEncyclopedia of Chart PatternsThomas N. BulkowskiIntegrated Technical AnalysisIan CopseyFinancial Markets Tick by Tick: Insights in Financial Markets MicrostructurePiere LequeuxTechnical Market Indicators: Analysis and PerformanceRichard J. Bauer and Julie R. DahlquistTrading to Win: The Psychology of Mastering the MarketsAri KievPricing Convertible BondsKevin ConnollyAt the Crest of the Tidal Wave: A Forecast for the Great Bear MarketRobert R. Prechter
FIBONACCI AND GANNAPPLICATIONS IN FINANCIALMARKETSPractical Applications of Natural and Synthetic Ratios inTechnical AnalysisGeorge Alexander MacLean
Copyright 2005John Wiley & Sons Ltd, The Atrium, Southern Gate, Chichester,West Sussex PO19 8SQ, EnglandTelephone ( 44) 1243 779777Email (for orders and customer service enquiries): cs-books@wiley.co.ukVisit our Home Page on www.wileyeurope.com or www.wiley.comAll Rights Reserved. No part of this publication may be reproduced, stored in a retrieval system ortransmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning orotherwise, except under the terms of the Copyright, Designs and Patents Act 1988 or under the terms ofa licence issued by the Copyright Licensing Agency Ltd, 90 Tottenham Court Road, London W1T 4LP,UK, without the permission in writing of the Publisher. Requests to the Publisher should be addressedto the Permissions Department, John Wiley & Sons Ltd, The Atrium, Southern Gate, Chichester, WestSussex PO19 8SQ, England, or emailed to permreq@wiley.co.uk, or faxed to ( 44) 1243 770620.Designations used by companies to distinguish their products are often claimed as trademarks. Allbrand names and product names used in this book are trade names, service marks, trademarks orregistered trademarks of their respective owners. The Publisher is not associated with any product orvendor mentioned in this book.This publication is designed to provide accurate and authoritative information in regard to the subjectmatter covered. It is sold on the understanding that the Publisher is not engaged in renderingprofessional services. If professional advice or other expert assistance is required, the services of acompetent professional should be sought.Other Wiley Editorial OfficesJohn Wiley & Sons Inc., 111 River Street, Hoboken, NJ 07030, USAJossey-Bass, 989 Market Street, San Francisco, CA 94103-1741, USAWiley-VCH Verlag GmbH, Boschstr. 12, D-69469 Weinheim, GermanyJohn Wiley & Sons Australia Ltd, 33 Park Road, Milton, Queensland 4064, AustraliaJohn Wiley & Sons (Asia) Pte Ltd, 2 Clementi Loop #02-01, Jin Xing Distripark, Singapore 129809John Wiley & Sons Canada Ltd, 22 Worcester Road, Etobicoke, Ontario, Canada M9W 1L1Wiley also publishes its books in a variety of electronic formats. Some content that appears in printmay not be available in electronic books.British Library Cataloguing in Publication DataA catalogue record for this book is available from the British LibraryISBN-13 978-0-470-01217-8 (HB)ISBN-10 0-470-01217-X (HB)Typeset in 10.5 on 13 pt Times by TechBooks, New Delhi, India.Printed and bound in Great Britain by T.J. International Ltd, Padstow, Cornwall.This book is printed on acid-free paper responsibly manufactured from sustainable forestryin which at least two trees are planted for each one used for paper production.
ContentsPrefaceix1 Introduction to and History of the Fibonacci Sequence12 Application to Financial Market Analysis93 Other Applications of the Fibonacci Retracements and Extension274 Charting and Difficulties: A Historical Perspective415 Common Errors in Application of Fibonacci Retracementsand Extension556 Application and Common Errors in Fibonacci Fanlines757 Application and Common Errors in Fibonacci Timelines1038 Total Analysis – Pulling All the Skills and Techniques Together1279 Gann, The Misunderstood Analysis14510 Other Interesting Studies Using Synthetic Ratios17311 Conclusion193
viContentsAppendix 1 Data Problems203Appendix 2 Glossary of Common Terms215Bibliography221Index223
For Angus and Jenny for all the skills and encouragement and to the Great, theGood and the Gurus for the knowledgeCuimhnichibh air na daoine bho’n d’thainig sibh(Gaelic proverb)
AcknowledgementsThanks are due to Equis International, www.equis.com, a wholly owned subsidiaryof Reuters PLC, for allowing the use of the MetaStock charting system for production of the charts in this publication. Without this charting program the book wouldbe incomprehensible.A very special thank you to all concerned with the publication of this title, especially those leading me by the hand at John Wiley & Sons. Writing this book was adaunting task and the support from editorial, production and marketing staff hasbeen exceptional.
PrefaceTechnical analysis is not a difficult subject for study, but it does suffer from a badpress from time to time. It attracts strong personalities, as it is a very small pond andstrong characters tend to stand out more and get heavy coverage in the media; wecan suffer from the bad press by having far too many technicians saying they forecasted various key corrections in the past. These boasts have to be taken with apinch of salt. Publicity for technical analysis in the media is a good thing as technical analysts are not shy and tend not to hide under bushels. However, within our owncommunity the real stars are the quiet ones who do sterling work and research dayin, day out with little or no acknowledgement.These are the experienced analysts who take time to dispense their accumulatedknowledge of market analysis and strive to further the bounds of technical education and study. Market understanding has fallen out of favour in recent years astraders shrink the timeframes necessary for a profitable trade. However, that wasfine in the bull market times, but is much more difficult in choppy bearish ones.Anyone can catch the trend from simply looking at a screen, but it takes a trainedeye to spot when an asset price is running out of steam and indeed looking risky.It is in such situations that the skills of a good technical analyst come to the fore.In the last 20 years the study of technical analysis has become more formalised. Inthe past, charting and interpretation skills were passed on from individual to individual or perhaps even picked up from the plethora of business biography booksavailable. However, this is not an ideal situation and a more formal approach isneeded. It has been with the networking of analysts regionally and globally that hasseen the development of training courses, seminars and even television training. Itis to this corpus of information that this book hopes to add.When I started out as a trainee technical analyst I was never allowed to act on anyof my analyses until I had proved myself with a professional qualification in technicalanalysis, so my learning was bookish and dry and suffered from lack of practical
xPrefaceapplication. However, subsequent employment opportunities gave me practical skillsthat cannot be found in any of the more traditional textbooks. Practical technical analysis is quite different from a bookish one – the sheer volume of instruments that have tobe analysed on a daily basis, coupled with constraints on time, which mean that not allstudies have the time to be drawn, means that the contemporary technical analyst hasto be knowledgeable as to when to cut corners, and more importantly when not to.Traditional paper charting days are gone, as is the gentle skill of taking time tolook at trend, pattern and Point and Figure charts and taking a measured long-termview. It is not uncommon for a technical analyst today to consider the long-termview as being until lunchtime. Screen-based charting and price information haveallowed this shortening in timescales to develop, but not without some cost. Longterm studies of any financial market are few and far between.It is only through continued practice and study of new techniques and reviews ofold long-learned ones that technical analysts will improve their skills. Technicalanalysis is not a Dark Art practised by very few acolytes; it offers skills and opportunities to look at markets from both a scientific and an artistic bias, as true technical analysis is a porous membrane between science and art and both skills areneeded if the technical view is to be successful.This book looks at the application of two of the more ‘obscure’ techniques,Fibonacci applications and Gann theory. Both of these techniques have a long andglorious application history, but it is the careful application of these techniques thathas been overlooked now that many charting packages conveniently draw the various patterns on a screen. This book looks at the drawbacks of this convenience andpoints the student of technical analysis in the right direction and hopefully encourages good technical practice.While it can be enough to take positions on Fibonacci and Gann analysis alone,it would be seriously wrong to overlook other technical tools. There is a chapter thatlooks at ‘Total Analysis’ (Chapter 8) where a sequence of analysis tools, which givea better understanding of the outlook, is suggested.Contemporary technical analysts stand on the shoulders of giants in our field, andI am fortunate to have met and studied and practised under some of the greats. Bronwen Wood FSTA started me off in this field and her lectures were inspirational. Sheis greatly missed. Tony Plummer, who turned me from technical analysis of equitiesto Gilts, can take the blame for my subsequent career. Thanks are also due to GerryCelaya for showing me how not to be frightened by either intraday charts orFibonacci tool attack and my fellow board members of the Society of TechnicalAnalysts, especially John Cameron FSTA for encouragement.Finally, to the stars and giants of the future, this book is addressed to you.George Alexander MacLeanLondon
1Introduction to and Historyof the Fibonacci SequenceA brief look at mathematical proportion calculations and some interestingfacts about this ratio.The origins of the Fibonacci sequence are well known to architects, artists and technical analysts, but knowledge of the importance of the Golden Section was knownfurther back in ancient history, definitely as far as the Greeks and, depending onwhich source is read, as far back as ancient Egyptians and Sumerians. However,evidence for understanding and usage in ancient Sumer is tenuous at best.Taking a line of any length, the ancients discovered that there was a point on theline where the proportions of the whole to the larger section was the same proportion of the smaller section to the larger section. This point on the line is called theGolden Section.Knowledge of irrational numbers was known in antiquity, and for the Greeks,especially the Pythagorean school, came as a shock. In ancient times, rational numbers (1, 2, 3, etc.) were believed to have the secret of all knowledge and that anylength could be measured using whole number units only; e.g. 9.65 was actually965 units of some smaller measure. The discovery of pi ( ) came as a surprise to theGreeks looking at the relationship between the diameter of a circle and its circumference, as the multiplication factor to find the circumference was not a whole number. Imagine the additional shock of discovering that in a square of side one unit thediagonal was not a whole number that could be counted? That is to say, within the linesection that gives the Golden Mean, there is no measure, no matter how small, thatwill give the result that one part of the line section is a whole number of measuring
2Fibonacci and Gann Applications in Financial Marketsunits and the smaller is also a whole number. The inability to find common measures that will give whole numbers for the two sections means that the proportion isincommensurable.This meant that there was no number representing the hypotenuse of the triangleof sides equal to one, or within the line section, that could be seen as the product oftwo others, no matter how they searched. That was just the start as more and moreof what we now call irrational numbers were discovered. It is into this group that theGolden Section belongs. The Golden Section is an incommensurable number, i.e. itcannot be represented as a fraction, and was represented by the Greek letter (tau),being the first letter of the word for ‘the cut’, (to-mi) in Greek. Contemporarysymbolism for the Golden Section is ‘ ’, which was suggested in the early 20thcentury by Mark Barr, an American mathematician, as a homage to Phidias, theclassical Greek sculptor and builder of the Athenian Parthenon and of the Temple ofZeus at Olympus. What greater honour could there be?Much later, in the 15th century in Pisa, Italy, Leonardo de Fibonacci constructeda simple series after observing the population expansion of a pair of rabbits. Henoted that it took one generation before each new pair reached sexual maturity andthe population exploded. The total number of pairs (breeding and immature) wasnoted down. In Figure 1.1, taken from data in Table 1.1, the normal notation frombiological science is used, where Fn is the filial generation and n is the number of2.151.951.751.551.351.150.950.75123456Figure 1.1789101112
Introduction to and History of the Fibonacci Sequence3Table that generation. Taking this series (1, 1, 2, 3, 5, 8, 13 and so on), each subsequentfilial generation is seen as the sum of the previous two generations as follows:Fn Fn 2 Fn 1This is an infinite series without limit.An interesting corollary of this series is that there is a relationship between eachfilial total. TakingFnFn 1the series4.236, 2.618, 1.618, 0.618, 0.382, 0.236, 0.146very quickly tends to 1.618, as represented graphically by Figure 1.1. Further relationships are found by taking Fn with Fn 2, Fn with Fn 3, etc., resulting in the limits given in Figure 1.2, taken from the data in Table 1.2. These are important valuesfor the technical analyst, for from these our ‘common or garden’ Fibonacci ratio of61.8% is derived.Reversing the ratio will give similar limits, with 0.618, 0.382, 0.236 as key here.These are the main ratios used in technical analysis and a discussion and applicationchapter follows later in the book. The table of Fibonacci ratios is1.618, 2.618, 4.236, 0.618, 0.382, 0.236 and 0.146Normally in technical analysis, these are expressed as percentages:161.8%, 261.8%, 243.6%, 61.8%, 38.2%, 23.6% and 14.6%The interesting number of 1.618 is also derived from the following infinite fraction:11 11 11 1 11
4Fibonacci and Gann Applications in Financial 13Figure 1.2Table 1.2n 1 2F 1 hough this looks complicated, making the above equal to x, it breaks down tox 1 1xresulting in x2 x 1 once both sides are multiplied by x. Therefore, using thequadratic solution ofx b ; 2b2 4ac2awith a 1, b 1 and c 1 (from x2 x 1 0)givesx ( 1) ; 2( 1)2 4.1( 1)1 ; 21 41 ; 25 x x 2.122which results in x 1.618 033 9 ( ) and 0.618 033 9, which is 1/ .
Introduction to and History of the Fibonacci Sequence5There are many volumes that look at the interesting properties and occurrencesof this ratio in nature. Some key examples of this are the famous nautilus shellchambers, the sunflower head seed pattern and the spiral in a galaxy, and in architecture the ratio of the length to the width of the Parthenon of Phidias, which isseen as the epitome of classical proportion. In other art forms such as fresco and oilpainting, the proportions of the setting are often seen in the above ratio, especiallyin the work of Leonardo da Vinci and in the 20th century in the religious art of Salvador Dali. Closer to home, the human ear length needs to be 1.618 greater than thewidth to be said to be ‘in proportion’, as are the relationships between limbs andthe ratio of the navel to the feet and total height, as in the work of Le Corbusier(Charles Edouard Jeanneret), in The Modulor: A Harmonious Measure to theHuman Scale Universally Applicable to Architecture and Mechanics and Modulor 2(Let the User Speak Next) with the Red and Blue scales of proportion. However, LeCorbusier had to force his proportion system to appear as the Golden Ratio, giventhat his original premise was that the male figure in his drawings had to be Britishand not French in order to get the height of the figure with arm outstretched aboveequal to 220 cm.The human eye sees proportion in interesting ways: what is pleasing to the eyegenerally is seen as beauty. It does not take long to see that something is ‘out ofproportion’ in nature, and no more so than the frequent occurrences of the ratio onand within the human body. Artists and architects have used this relationship,often called the ‘Golden Mean’, for centuries to produce work that is pleasing tothe eye.The following derivation of the Fibonacci spiral contains some very basic algebrawhich I hope will not confuse the reader so early on in this general work.Beginning with a square of side unit equal to 1, one of the sides is extended so thatthe ratio of the new line to the old side of the square is in the Golden Mean, i.e. thenew total length is , being the original size of the square edge the new line( 1). Now, completing a new square adjacent to the original, this will have a sideof length 1. Again extending the side of this square so that the new length equalsthat of the original square, i.e. size 1, the length of this addition is calculated from1 x (1 ), where x is the length of the line extensionSolving gives x 2 . Repeating this process, the next line extension will joinback to one of the corners of the original square.This unknown (y) can be calculated from some of the previous lengths as follows.The initial extension line was of size 1 and part of that is the x found above.Therefore,f 1 x y 2 f y
6Fibonacci and Gann Applications in Financial Marketsand soy f 1 2 f 2f 3Again repeating this move, a square is formed with sides equal to y and an extensionline z is drawn. This can be calculated as y z 1 1 (the side of the original square):z 1 1 f y 2 f (2f 3) 5 3fAgain a square is completed, now with side z, and an extension line is also drawn.The length of this extension line is calculated from the knowledge gained before: 1, the initial extension line length, is equal to x z q, where q is the newlength. Thusq f 1 x z f 1 (2 f) (5 3f) f 1 2 f 5 3f 5f 8Continuing this process, the next line length is r. As we know that r z y, thenr y z 5 3f 5f 8 13 8fThe natural occurrence of the Fibonacci ratio is most famously seen in the developing chambers of the nautilus shell. Here each new chamber is 1.618 greater thanthe previous one as the crustacean grows in size.In addition, the pattern of seeds in a sunflower head also show this relationship.Here two concentric spirals compete and grow as the flower head develops. The spirals increase in size as the flower grows and the spiral increases at 1
Single Stock futures: A Trader’s Guide Patrick L. Young and Charles Sidey Uncertainty and Expectation: Strategies for the Trading of Risk Gerald Ashley Bear Market Investing Strategies Harry D. Schultz The Psychology of Finance, revised edition Lars Tvede The Elliott
W.D. Gann grew up around cotton warehouse where cotton was king. William Delbert Gann was born June 6, 1878, in Lufkin, Texas, to Sam H. and Susan R. Gann, immigrants to Texas from the British Isles. Lufkin is midway between Houston and Texarkana. This part of Texas is cot-ton country and Gann
W.D.Gann Calculator Available Tools: 1.Automated Tools: Gann Time Analysis Gann Square of 9 Gann Square of 12
The Fibonacci-based numeral framework N(Fm, {0, 1}) is the numeral framework that utilizes Fibonacci arrangement as the premise. The meaning of the Fibonacci grouping [3] is given in Eq. 2. A number v is spoken to as the summation of some Fibonacci numbers, and no Fibonacci number is in the summation more that once, as demonstrated in Eq. 2 .
Fibonacci is s famous mathematical sequence. Each number within the sequence is a sum total of the two preceding numbers: 1, 1, 2, 3, 5, 8, 13 and so on. The Fibonacci sequence is key to calculating retracement lines. This is achieved through Fibonacci ratios. There are three Fibonacci ratios that traders need to be aware of: 61.8% (any
Fibonacci trading in Forex To draw Fibonacci, we need to select a swing move. Additionally, we have to try to do that in the right direction. That is why it is crucial to understand price behaviour, trends, swings. . Fibonacci trading is a technique, where you are using tools based on Fibonacci numbers to predict possible turning points.
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Calculating Price and Time Objectives from a Gann Wheel A detailed foundation for Gann analysis and how to use a Gann Wheel to calculate both time and price objectives are illustrated. This discussion reveals why most students of W. D. Gann abandon this methodology in
W.D. Gann's famously quoted "Law of Vibration". This book is based on what W. D. Gann said in The Ticker and Investment Digest interview from 1909. In reviewing Gann's words from the Ticker, it is clear his market application was based upon math and science. No hocus pocus, no astrology,
