Using Fibonacci To Determinate Market Goals- Part III

Using Fibonacci To Determinate Market Goals- Part III

In order to make it as objective as possible, the study was based in those pairs with higher volume trade in the Forex market, because they accumulate the 85% of the daily transactions.

Application in the Objective Market

Definition of the sample

Once chosen the objective market, the study was focused in 4 (four) currency pairs, in the Forex International Market.

In order to make it as objective as possible, the study was based in those pairs with higher volume trade in the Forex market, because they accumulate the 85% of the daily transactions.

• Pair EUR (Euro)/USD (United States Dollars)

Since it’s apparition in December 1999, the Eur, soon replace the German Mark, and becomes the second currency in the world, getting day by day more importance. The strength of EUR is based on the power of the European Economic Community, no matter how many political factors may affect it.

• Pair GBP (Great Britain Pound)/USD

It was the reference currency till Second War, and most of the transaction involving it. Took place in London, the biggest international market regardless his small volume during American market sessions.

• Pair USD/JPY (Japanese Yen)

This is the third currency trade in the world, making market liquid 24 hours a day. Notice that oriental economy moves according to Japan, and so, Yen is very sensitive to oriental agricultural production, technological factors, salaries and NIKKEI.

• Pair USD/CHF (Helvetic Confederation Franc)

This is the other European currency not included in Eur or G-7, but at the same time, it seems favour related to politic uncertainly of the European Community. Practically, we can say that Swiss Franc moves almost the same way that EUR in relation with the USD.

Sample: scope

This work was developed based in the following time frames, because they represent a prominent quantity of subjacent quotation time, and allows reducing “noise”, in short time:

• Daily sessions: 24 hours of transactions or quotations. We use it to deeply analyze the trend in Medium Term (weeks) and Long Term (months).

• 4 (Four) hours sessions, that gives us more detail of temporality, due to in a 24 hours day trading there are moments with higher transaction volume, like the opening or close of the biggest world financial centers (Tokyo, London, Frankfurt and New York).

Anyway, we invite the readers to extend this analysis to sessions with more or less duration, where you can find similar results.

Field work

Once introduced Leonardo Pisano and his invaluable contribution to science, we will stop at his more important ratios, specifically in the target zones created because of them.

Based on what we can see in financial markets, there are retracements or backward movements in a certain percentage. According to Fibonacci, in a strong tendency, a minimum retracement generally address in its first impulse to the zone of 23.6% of the rally; and in case this zone is broken, the quotation usually goes to the zone near the 38.2%, then to the 50 % zone, and in a weaker tendency, the maximum retracement could reach the 61.8%; but if this point is broken, the quotation will continue to a point not consider by Leonardo Pisano, but very important to remark, because of the results given in our diary work, the 76,4 % to finally reach the 100 %.

Once the quotation runs over the 100 % retracement, and confirms that point, we can suppose that the dominant tendency has changed, and price will look for other objectives, that according to Fibonacci, will be at first place the 161.8%, then the 261.8% and finally the 423.6%.

In Table 2, you can see Fibonacci ratios, coming from the division of each number of the numerical sequence he developed by the one before it.

Now we propose combine the price Fibonacci retracements with the Zigzag Oscillator, in a major defined trend, to corroborate the accomplishing of the target quotations.

The popularity and use of Zigzag oscillator are based in three main characteristics: is a good “noise” filtering; it represents the main trend clearly, and is a simple indicator for the market price final interpretation.

However, this oscillator has as main disadvantage his natural dynamic: the last line of its draw marking trend could be tricky and needs confirmation.

It works simply presenting the major movement by connecting picks (high prices) and depressions (low prices) with straight lines.

The inclination parameter of the slope in the specific quotation specifies the percentage that this price has to move to draw a new line or Zigzag line.

Its formula is:

This oscillator filters the changes in the subjacent chart, smaller than the quantity specified in the inclination parameter of the scope. It only shows significant changes. The minimum price movements are fixed as percentages, and could be based in close price, or in maximum/minimum ranges.

For example, the Zigzag established in a 10% respect to the OHCL (Open-High-Close-Last) candles, will draw a line that will only change direction if the changes between maximum and minimum exceed the 10%. This means any smaller variation will be ignored.

Then, after we defined the system used to calculate the bullish or bearish rallies objectives, through Zigzag Oscillator, we start the empiric confirmation of the information for each pair under study, main subject of the next session.

Facundo Molina is founder and director of MolFX - Management, a company fully specialized in Foreign Exchange Markets, with an important client portfolio through Capital Markets Services LLC (CMS). He has a BA Business Management at the Universidad Nacional del Sur (Argentina), where he has a doctorate degree based on the application of Fibonacci theory into financial markets. He also acts as professor of new and experiments traders.