JWBK027-FM[i-x].qxd 3/31/05 4:08 PM Page i QUARK04 27A:JWBL027:Chapters:Chapter-FM: Fibonacci and Gann Applications in Financial Markets JWBK027-FM[i-x].qxd 3/31/05 4:08 PM Page ii QUARK04 27A:JWBL027:Chapters:Chapter-FM: WILEY TRADING SERIES 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 Wave Principle: Key to Market Behavior Robert R. Prechter International Commodity Trading Ephraim Clark, Jean-Baptiste Lesourd and René Thiéblemont Dynamic Technical Analysis Philippe Cahen Encyclopedia of Chart Patterns Thomas N. Bulkowski Integrated Technical Analysis Ian Copsey Financial Markets Tick by Tick: Insights in Financial Markets Microstructure Piere Lequeux Technical Market Indicators: Analysis and Performance Richard J. Bauer and Julie R. Dahlquist Trading to Win: The Psychology of Mastering the Markets Ari Kiev Pricing Convertible Bonds Kevin Connolly At the Crest of the Tidal Wave: A Forecast for the Great Bear Market Robert R. Prechter JWBK027-FM[i-x].qxd 3/31/05 4:08 PM Page iii QUARK04 27A:JWBL027:Chapters:Chapter-FM: FIBONACCI AND GANN APPLICATIONS IN FINANCIAL MARKETS Practical Applications of Natural and Synthetic Ratios in Technical Analysis George Alexander MacLean JWBK027-FM[i-x].qxd 3/31/05 4:08 PM Page iv QUARK04 27A:JWBL027:Chapters:Chapter-FM: Copyright © 2005 John Wiley & Sons Ltd, The Atrium, Southern Gate, Chichester, West Sussex PO19 8SQ, England Telephone (+44) 1243 779777 Email (for orders and customer service enquiries): [email protected] Visit our Home Page on www.wileyeurope.com or www.wiley.com All Rights Reserved. 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JWBK027-FM[i-x].qxd 3/31/05 4:08 PM Page v QUARK04 27A:JWBL027:Chapters:Chapter-FM: Contents Preface ix 1 Introduction to and History of the Fibonacci Sequence 1 2 Application to Financial Market Analysis 9 3 Other Applications of the Fibonacci Retracements and Extension 27 4 Charting and Difficulties: A Historical Perspective 41 5 Common Errors in Application of Fibonacci Retracements and Extension 55 6 Application and Common Errors in Fibonacci Fanlines 75 7 Application and Common Errors in Fibonacci Timelines 103 8 Total Analysis – Pulling All the Skills and Techniques Together 127 9 Gann, The Misunderstood Analysis 145 10 Other Interesting Studies Using Synthetic Ratios 173 11 Conclusion 193 JWBK027-FM[i-x].qxd 3/31/05 4:08 PM Page vi QUARK04 27A:JWBL027:Chapters:Chapter-FM: vi Contents Appendix 1 Data Problems 203 Appendix 2 Glossary of Common Terms 215 Bibliography 221 Index 223 JWBK027-FM[i-x].qxd 3/31/05 4:08 PM Page vii QUARK04 27A:JWBL027:Chapters:Chapter-FM: For Angus and Jenny for all the skills and encouragement and to the Great, the Good and the Gurus for the knowledge Cuimhnichibh air na daoine bho’n d’thainig sibh (Gaelic proverb) JWBK027-FM[i-x].qxd 3/31/05 4:08 PM Page viii QUARK04 27A:JWBL027:Chapters:Chapter-FM: Acknowledgements Thanks are due to Equis International, www.equis.com, a wholly owned subsidiary of Reuters PLC, for allowing the use of the MetaStock charting system for produc- tion of the charts in this publication. Without this charting program the book would be incomprehensible. A very special thank you to all concerned with the publication of this title, espe- cially those leading me by the hand at John Wiley & Sons. Writing this book was a daunting task and the support from editorial, production and marketing staff has been exceptional. JWBK027-FM[i-x].qxd 3/31/05 4:08 PM Page ix QUARK04 27A:JWBL027:Chapters:Chapter-FM: Preface Technical analysis is not a difficult subject for study, but it does suffer from a bad press from time to time. It attracts strong personalities, as it is a very small pond and strong characters tend to stand out more and get heavy coverage in the media; we can suffer from the bad press by having far too many technicians saying they fore- casted various key corrections in the past. These boasts have to be taken with a pinch of salt. Publicity for technical analysis in the media is a good thing as techni- cal analysts are not shy and tend not to hide under bushels. However, within our own community the real stars are the quiet ones who do sterling work and research day in, day out with little or no acknowledgement. These are the experienced analysts who take time to dispense their accumulated knowledge of market analysis and strive to further the bounds of technical educa- tion and study. Market understanding has fallen out of favour in recent years as traders shrink the timeframes necessary for a profitable trade. However, that was fine 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 trained eye 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. In the past, charting and interpretation skills were passed on from individual to indi- vidual or perhaps even picked up from the plethora of business biography books available. However, this is not an ideal situation and a more formal approach is needed. It has been with the networking of analysts regionally and globally that has seen the development of training courses, seminars and even television training. It is 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 any of my analyses until I had proved myself with a professional qualification in technical analysis, so my learning was bookish and dry and suffered from lack of practical JWBK027-FM[i-x].qxd 3/31/05 4:08 PM Page x QUARK04 27A:JWBL027:Chapters:Chapter-FM: x Preface application. However, subsequent employment opportunities gave me practical skills that cannot be found in any of the more traditional textbooks. Practical technical analy- sis is quite different from a bookish one – the sheer volume of instruments that have to be analysed on a daily basis, coupled with constraints on time, which mean that not all studies have the time to be drawn, means that the contemporary technical analyst has to 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 to look at trend, pattern and Point and Figure charts and taking a measured long-term view. It is not uncommon for a technical analyst today to consider the long-term view as being until lunchtime. Screen-based charting and price information have allowed this shortening in timescales to develop, but not without some cost. Long- term studies of any financial market are few and far between. It is only through continued practice and study of new techniques and reviews of old long-learned ones that technical analysts will improve their skills.